defa14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive Proxy Statement
þ Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12
BALLY TOTAL FITNESS HOLDING CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
o Fee paid previously with preliminary materials.
o Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form or Schedule and the date of its
filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
|
|
|
SEC 1913 (11-01)
|
|
Persons who are to respond to the collection of
information contained in this form are not required to
respond unless the form displays a currently valid OMB
control number. |
Attached hereto is a copy of the Ballys Answer and Counterclaim with respect to
Civil Action No. 1833-N filed in the Court of Chancery of the State of Delaware in and for New
Castle County on January 9, 2006.
Also
attached hereto is a copy of Ballys press release issued on January 10, 2006.
Important Additional Information Filed with the SEC
On December 27, 2005, as amended on January 9, 2006, Bally filed a definitive proxy statement with
the SEC. The proxy statement was mailed to Bally stockholders on December 28, 2005. INVESTORS AND
STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT CAREFULLY BECAUSE IT CONTAINS IMPORTANT
INFORMATION ABOUT BALLY. Investors and stockholders are able to obtain free copies of the Proxy
Statement and other documents filed with the Securities and Exchange Commission (the SEC) by
Bally through the web site maintained by the SEC at www.sec.gov. In addition, investors and
stockholders are able to obtain free copies of the Proxy Statement and other documents filed with
the SEC by Bally by directing a request to Bally Total Fitness Holding Corporation, 8700 West Bryn
Mawr Avenue, Chicago, Illinois 60631, Attention: Investor Relations: Proxy Request.
LISTING OF PERSONS WHO MAY BE DEEMED PARTICIPANTS IN THE SOLICITATION AND CERTAIN INFORMATION
CONCERNING SUCH PERSONS IS SET FORTH IN THE COMPANYS DEFINITIVE PROXY STATEMENT DATED DECEMBER 27,
2005, AS AMENDED ON JANUARY 9, 2006, WHICH MAY BE OBTAINED THROUGH THE WEB SITE MAINTAINED BY THE
SEC AT www.sec.gov.
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
|
|
|
|
|
|
|
LIBERATION INVESTMENTS, L.P. and
|
|
|
) |
|
|
|
LIBERATION INVESTMENTS, LTD.
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
Plaintiffs,
|
|
|
) |
|
|
|
|
|
|
) |
|
|
Civil Action No. 1833-N |
v.
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
BALLY TOTAL FITNESS HOLDING
|
|
|
) |
|
|
|
CORPORATION and PAUL A. TOBACK
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
Defendants.
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
BALLY TOTAL FITNESS HOLDING
CORPORATION
|
|
|
)
)
) |
|
|
|
|
|
|
) |
|
|
|
Counterclaimant,
|
|
|
)
) |
|
|
|
v.
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
LIBERATION INVESTMENTS, L.P.;
|
|
|
) |
|
|
|
LIBERATION INVESTMENTS, LTD.;
|
|
|
) |
|
|
|
PARDUS EUROPEAN SPECIAL
|
|
|
) |
|
|
|
OPPORTUNITIES MASTER FUND L.P.;
|
|
|
) |
|
|
|
PARDUS CAPITAL MANAGEMENT L.P.;
|
|
|
) |
|
|
|
PARDUS CAPITAL MANAGEMENT LLC;
|
|
|
) |
|
|
|
EMANUEL PEARLMAN; DON R.
|
|
|
) |
|
|
|
KORNSTEIN; KARIM SAMII; and JOSEPH
|
|
|
) |
|
|
|
THORNTON
|
|
|
) |
|
|
|
|
|
|
) |
|
|
|
Counterclaim Defendants.
|
|
|
) |
|
|
|
ANSWER AND COUNTERCLAIM
Defendants Bally Total Fitness Holding Corporation (Bally or the Company) and Paul A.
Toback, by and through their undersigned attorneys, hereby respond to plaintiffs complaint (the
Complaint) as follows:
1. Defendants deny the allegations contained in the first and second sentences of
paragraph 1 of the Complaint. Defendants deny knowledge or information sufficient to form a
belief as to the truth of the allegations contained in the third sentence of paragraph 1 of
the Complaint.
2. Defendants deny the allegations contained in paragraph 2 of the Complaint, except
defendants admit that (i) one of the purposes of the Companys stockholder rights plan was to
protect the Companys stockholders from unfair or coercive takeover proposals; (ii) at the time the
rights plan was adopted, Ballys directors knew that a significant percentage of the Companys
stock was held by institutional investors and (iii) at the time the rights plan was adopted,
Ballys directors knew that Pardus Capital Management (Pardus) had previously asked the Company
to appoint certain individuals as directors of Bally.
3. Defendants admit the allegations contained in the first, second, third and fifth
sentences of paragraph 3 of the Complaint. Defendants deny the allegations contained in the fourth
and sixth sentences of paragraph 3 of the Complaint, except defendants admit that at the time the
rights plan was adopted, the Bally directors were aware that plaintiffs had previously brought an
action against Bally pursuant to 8 Del. C. § 211.
4. Defendants admit the allegations contained in the first, second and fourth
sentences of paragraph 4 of the Complaint. Defendants deny the allegations contained in the third,
fifth and sixth sentences of paragraph 4 of the Complaint, except defendants admit that at the time
the rights plan was adopted, there were two vacancies on Ballys board of directors in classes that
were not standing for election at the next annual meeting of stockholders.
5. Defendants deny the allegations contained in paragraph 5 of the Complaint.
6. Defendants deny the allegations contained in paragraph 6 of the Complaint.
7. Defendants incorporate their answer to paragraph 6 of the Complaint. Defendants
deny the allegations contained in the first and third sentences of paragraph 7 of the Complaint.
- 2 -
Defendants deny knowledge or information sufficient to form a belief as to the truth of the
allegations contained in the second sentence of paragraph 7 of the Complaint.
8. Defendants deny the allegations contained in the first, second and third
sentences of paragraph 8 of the Complaint. Defendants deny knowledge or information sufficient to
form a belief as to the truth of the allegations contained in the third, fourth, fifth, sixth and
seventh sentences of paragraph 8 of the Complaint.
9. Defendants deny the allegations contained in paragraph 9 of the Complaint, except
defendants admit that (i) after the rights plan was adopted, plaintiffs initiated an action
pursuant to 8 Del. C. § 220; (ii) Bally produced documents to plaintiffs counsel in connection
with that action on December 9, 2005 and (iii) plaintiffs counsel is prohibited from disclosing
the contents of those documents.
10. Defendants admit the allegations contained in paragraph 10 of the Complaint.
11. Defendants deny the allegations contained in the first and second sentences of
paragraph 11 of the Complaint. Upon information and belief, defendants deny the allegations
contained in the third sentence of paragraph 11 of the Complaint. The allegations contained in the
fourth sentence of paragraph 11 of the Complaint set forth legal conclusions to which no responsive
pleading is required. To the extent a response is required, defendants deny the allegations,
except defendants admit that Liberation suggested Don Kornstein to Pardus as a director nominee.
12. Defendants deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in the first sentence of paragraph 12 of the Complaint. Upon
information and belief, defendants deny the allegations contained in the second and third sentences
of paragraph 12 of the Complaint. The allegations contained in the fourth and fifth sentences of
paragraph 12 of the Complaint set forth legal conclusions to which no responsive
- 3 -
pleading is required. To the extent a response is required, defendants deny the allegations,
except defendants admit that (i) Liberation suggested Mr. Kornstein to Pardus as a director nominee
and (ii) the other two directors on the Pardus slate have been nominated by the Company.
13. The allegations contained in paragraph 13 of the Complaint set forth legal
conclusions to which no responsive pleading is required. To the extent a response is required,
defendants deny the allegations.
14. Defendants deny the allegations contained in paragraph 14 of the Complaint.
15. Defendants deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in the first and second sentences of paragraph 15 of the
Complaint. Defendants admit the allegations contained in the third and fourth sentences of
paragraph 15 of the Complaint.
16. Defendants admit the allegations contained in paragraph 16 of the Complaint.
17. Defendants deny the allegations contained in paragraph 17 of the Complaint,
except defendants admit that (i) Mr. Toback is currently Ballys chairman and chief executive
officer (ii) Mr. Toback became chief executive officer of Bally in December 2002 upon the
resignation of Lee Hillman; (iii) Mr. Toback became chairman of the board of directors of Bally in
May 2003 and (iv) Mr. Toback previously worked for the mayor of Chicago and the federal government.
18. Defendants admit the allegations contained in the first, second and third
sentences of paragraph 18 of the Complaint. Defendants deny the allegations contained in the
fourth sentence of paragraph 18 of the Complaint.
19. The allegations contained in paragraph 19 of the Complaint set forth legal
conclusions to which no responsive pleading is required. To the extent a response is required,
- 4 -
defendants deny the allegations, except defendants admit that (i) all of the directors of the
Company with the exception of Mr. Toback are independent and (ii) Mr. Toback and Barry Deutsch have
known each other since childhood and are long-time friends.
20. The allegations contained in paragraph 20 of the Complaint set forth legal
conclusions to which no responsive pleading is required. To the extent a response is required,
defendants deny the allegations, except defendants admit that Eric Langshurs term of office
expires at the next annual meeting of stockholders.
21. The allegations contained in paragraph 21 of the Complaint set forth legal
conclusions to which no responsive pleading is required. To the extent a response is required,
defendants deny the allegations, except defendants admit that John Rogers is a resident of Chicago
and is the chairman and chief executive officer of a privately held institutional money management
firm and mutual fund company.
22. Defendants admit the allegations contained in the first, second, fourth, fifth,
sixth and seventh sentences of paragraph 22 of the Complaint. Defendants deny the allegations
contained in the third sentence of paragraph 22 of the Complaint.
23. Defendants deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in the first, third and fifth sentences of paragraph 23 of the
Complaint, except defendants admit that Dr. Marilyn Seymann advised the Company that given her new
responsibilities as Associate Dean of the Arizona State University Law School and the schedule of
frequent board meetings as the Company moved through an extended audit process, she felt unable to
commit the time necessary to her directorial responsibilities. Defendants deny the allegations
contained in the second, fourth and sixth sentences of paragraph 23 of the Complaint, except
defendants admit that (i) Dr. Seymann resigned as a Bally director in August
- 5 -
2005 and (ii) Stephen Swid, an independent director who had previously been nominated by
dissident stockholders, resigned in August 2005.
24. Defendants admit the allegations contained in the first and second sentences of
paragraph 24 of the Complaint. Defendants deny the allegations contained in the third and fourth
sentences of paragraph 24 of the Complaint.
25. The allegations contained in paragraph 25 of the Complaint set forth the legal
conclusions to which no responsive pleading is required. To the extent a response is required,
defendants deny the allegations, except defendants admit that (i) the rights plan is valid and (ii)
Liberation has accurately quoted a portion of Ballys discovery responses in the action brought by
Liberation against Bally pursuant to 8 Del. C. § 220.
26. Defendants deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in the first and second sentences of paragraph 26 of the
Complaint, except defendants admit that plaintiffs suggested Don Kornstein to Pardus as a director
nominee. The allegations contained in the third and fourth sentences of paragraph 26 of the
Complaint set forth legal conclusions to which no responsive pleading is required. To the extent a
response is required, defendants deny the allegations. Defendants deny the allegations contained
in the fifth, sixth, seventh and eighth sentences of paragraph 26 of the Complaint, except
defendants admit that they have indicated to plaintiffs that the circumstances currently known to
defendants suggest that plaintiffs may be acting as a group with Pardus and other stockholders.
27. Defendants deny the allegations contained in paragraph 27 of the Complaint.
28. The allegations contained in paragraph 28 of the Complaint set forth legal
conclusions to which no responsive pleading is required. To the extent a response is required,
defendants deny the allegations, except defendants admit that rights plans are legitimate devices.
- 6 -
AFFIRMATIVE DEFENSES
FIRST AFFIRMATIVE DEFENSE
The Complaint fails to state a claim upon which relief can be granted.
SECOND AFFIRMATIVE DEFENSE
The relief requested by plaintiffs is barred by virtue of their unclean hands and/or their bad
faith.
THIRD AFFIRMATIVE DEFENSE
Plaintiffs have failed to join indispensable parties.
FOURTH AFFIRMATIVE DEFENSE
The relief requested by plaintiffs is barred, in whole or in part, by the doctrine of laches.
FIFTH AFFIRMATIVE DEFENSE
The relief requested by plaintiffs is barred by the doctrines of waiver and estoppel.
SIXTH AFFIRMATIVE DEFENSE
To the extent that plaintiffs seek monetary damages from Mr. Toback, such relief is barred, in
whole or in part, by Article THIRTEENTH of the Restated Certificate of Incorporation of Bally Total
Fitness Holding Corporation.
Defendants reserve the right to assert other defenses, counterclaims, cross-claims, and
third-party claims when and if they become appropriate in this action.
WHEREFORE defendants respectfully request that the Court:
(a) dismiss the Complaint with prejudice;
(b) enter judgment in favor of defendants and against plaintiffs;
(c) award to defendants all attorneys fees and costs incurred in the defense of this action;
and
(d) grant such other and further relief as the Court deems just and proper.
- 7 -
COUNTERCLAIM FOR DECLARATORY RELIEF
Defendant and Counterclaimant Bally Total Fitness Holding Corporation (Bally or the
Company), by and through its undersigned attorneys, states the following counterclaims against
Plaintiffs and Counterclaim Defendants Liberation Investments, L.P. and Liberation Investments,
Ltd. (collectively the Liberation Entities); and against Additional Counterclaim Defendants
Emanuel Pearlman and Don R. Kornstein (collectively with the Liberation Entities, Liberation);
Pardus European Special Opportunities Master Fund L.P., Pardus Capital Management L.P., and Pardus
Capital Management LLC (collectively, the Pardus Entities); and Karim Samii and Joseph Thornton
(collectively with the Pardus Entities, Pardus) and alleges as follows:
I. INTRODUCTION
1. This case is about two hedge funds secretly acting in concert to accomplish what neither
could lawfully do on its own. Specifically, the hedge funds have joined forces (including
understandings and arrangements as to the voting of shares) to destabilize the management and Board
of Directors of the Company at a critical juncture in its lifecycle, for differing yet equally
self-interested purposes.
2. In response to the perceived threat of stockholders acquiring a controlling stake through
creeping acquisitions without paying the other stockholders a control premium, Bally adopted a
garden-variety Rights Agreement establishing a stockholder rights plan (the Plan) of the type
that Delaware courts have long recognized as a valid device for this purpose.1 Both
Liberation and Pardus own more than 10% of the Companys stock; however, the existence of
|
|
|
1 |
|
Liberation, in fact, applauded the Plan at first
because it protected Liberation from the dangers of creeping acquisitions of
other hedge funds like Pardus. Now that the two are allies, Liberation instead
seeks the Plans invalidation. |
- 8 -
the Plan prevents either Liberation or Pardus from acquiring more than 15% without Board
approval, and thus deters any further efforts to take over the Company without first negotiating
with the Board. But the hedge funds prefer not to play by those rules. Instead, they are
apparently secretly acting together (albeit for different reasons), attempting to use their
combined voting power to displace management, seize control of the Company, and effect fundamental
changes that will help them achieve their respective selfish interests. If proved, such concerted
action would trigger both the Plan and Section 203 of the Delaware General Corporation Law
(DGCL).
3. Although they share a common objectivedestabilization of the Companys management and
BoardLiberation and Pardus have very different motivations for wanting to oust management and the
current independent Board.
4. Liberation (specifically Pearlman) is obsessed with ousting Ballys CEO, Paul Toback, and
perhaps others he considers responsible for the departure of Lee Hillman, the former CEO of Bally
who was found, by an independent investigation, to have been responsible for the culture of
aggressive accounting and inadequate internal controls that led to Ballys recent restatement of
financials that had been issued during Hillmans tenure. Pearlman and Hillman are close friends
and business associates, and Hillman is a founding and continuing investor in Liberation.
Furthermore, while CEO, Hillman retained Pearlman as an employee-consultant and caused Bally to
pay Pearlman millions of dollars in salary, restricted stock, and fees for now-failed acquisitions.
5. Current management, which has worked to redress the wrongs of this era of misconduct
through re-audit and restatement of the Companys financial statements and the addition of new and
independent directors, also terminated Mr. Pearlmans lucrative consulting arrangements, earning
Pearlmans enmity toward the Board and his irrational and compulsive
- 9 -
hatred of the Companys current CEO, Paul Toback. Following his departure, Pearlman has
engaged in an incessant campaign to exact revenge and destabilize the Company. He has worked
diligently both to disrupt the ongoing efforts of the Company to investigate the actions of former
management and to distort the markets perceptions of the inherent value of the Company by
disparaging management and the independent directors of the Board. This strategy enabled
Liberation to creep up to its current, almost 12% stake at the lowest possible cost at a time when
the Companys public stockholders were unable otherwise to evaluate Ballys value while the Company
completed the restatement of a multitude of accounting errors that occurred in periods under
Hillmans management.
6. Pardus, on the other hand, hopes to thwart the efforts, announced in December 2005, by the
Companys independent Board of Directors to explore strategic alternatives, intending instead to
double its current stake (acquiring as much as 30% of the Companys stock), to fill a majority of
the positions on Ballys Board, and then to lead a recapitalization from which it hopes to profit
at the expense of other stockholdersall efforts it has proposed to Bally, but which the Board has
properly rejected. Pardus hopes ultimately to gain control of the Company without paying the
premium for that control that Delaware law and Ballys independent Board would require.
7. Initially, perhaps Liberation and Pardus were acting independentlyeach having publicly
stated, even after Ballys Rights Plan was adopted, that they might separately slate candidates for
election at Ballys upcoming annual meeting of stockholders. However, Counterclaim Defendants
apparently came to realize that their independent efforts to mount separate proxy contests and to
slate competing candidates might counteract and dilute their common objective of defeating Ballys
candidates and proposals and obtaining influence and control over Bally. Accordingly, after the
Plan was adopted, Liberation and Pardus apparently
- 10 -
agreed to join forces, launching separate
challenges with a common destabilization objective. Pardus agreed to revise its director slate to
add Counterclaim Defendant Don R. Kornsteina long-time Pearlman loyalist and Liberation
investorand Liberation, in turn, secretly agreed to support that slate. Pardus and Liberation
apparently further agreed that Liberation would sponsor and Pardus would support stockholder
proposals seeking to depose Ballys current CEO and Chairman. The Liberation proposals would serve
both as a foil to destabilize the Company, the Board, and the strategic process initiated by
Ballys independent directors and as a means to obtain support of Kornsteins and the other Pardus
nominees candidacies by impugning current management so Liberation and Pardus could accomplish
their mutual goals.
8. On November 30, 2005, Bally completed its restatement and announced that its Board of
Directors has retained J.P. Morgan Securities Inc. to explore a range of strategic alternatives to
enhance stockholder value [including such possibilities as] a recapitalization, the sale of
securities or assets of the Company or the sale or merger of Bally. Ballys Board has undertaken
this step because the Company is at a crossroads financiallyBallys large debt load, created by
prior management and Pearlman, continue to leave the Company capital-constrained, and $300 million
of that debt (the 9.75% Senior Subordinated Notes) comes due in October 2007. Failure to
refinance that debt could result in various defaults under Ballys other debt obligations. The
necessary refinancing could include a significant equity recapitalization, with the issuance of
shares representing effective control of the Company.
9. Shortly after completing its restatement and announcing its strategic process, Bally filed
suit in federal court alleging, inter alia, that Counterclaim Defendants were acting in concert as
an undisclosed group. In prompt response, the Liberation Entities filed the Complaint in this
action seeking a declaration by this Court that the Plan is invalid. That alone is strong evidence
of the fact that concerted action has occurred because the Company has already
-11-
affirmatively
advised Liberation that the Plan does not preclude independently acting stockholders from voting in
favor of each others proposals or suggesting candidates to one another unless they have an
undisclosed agreement, arrangement, or understanding to work together to achieve their common
goals. Once Bally filed the federal action alleging Pardus and Liberation were acting as an
undisclosed group, Liberation quickly sought to invalidate the Plan in order to prevent the
issuance of Rights under the Plan to all of Bally stockholders other than Counterclaim Defendants
because the issuance of such Rights would effectively thwart Counterclaim Defendants inequitable
behavior. However, Liberation has so far successfully forestalled having to disclose that it and
Pardus are a group merely by the expedient of disclosing Ballys allegations to that
effect.2 Thus, Plaintiffs no longer need and have not sought to press their claim to
invalidate the Plan.
10. Events after the adoption of the Plan strongly suggest that Liberation and Pardus, who by
the Liberation Entities own admission collectively own approximately 26% of the Companys stock
(Complaint ¶¶ 23), have been acting in concert pursuant to an agreement, arrangement or
understanding, to vote the shares of the Company stock they own and for which they obtain proxies
in favor of directors nominated by Pardus and stockholder proposals submitted by Liberation with
the intention and effect of:
a. replacing incumbent, independent director Eric Langshur with Don R. Kornstein, who was
nominated by Pardus but admittedly suggested by Liberation;
b. seeking the election of two new directors selected by Pardus;
|
|
|
2 |
|
The federal court ruled that this was sufficient for purposes of the federal disclosure rules, and did not reach the question of whether Liberation and Pardus are in fact operating as a group. Bally has appealed the federal court ruling. |
-12-
c. promoting an inappropriate (and illegal) stockholder proposal to permit stockholders
directly to fire corporate officers and to prohibit the Boards reappointing any manager fired by
the stockholdersusurping the powers and duties of the Board of Directors to manage and direct the
business and affairs of the Company, as specified in Section 141 of the DGCL and the Companys
certificate of incorporation;
d. utilizing that stockholder proposal, if passed and not invalidated by this Court as
illegal, to remove Ballys Chairman and CEO, Paul A. Tobackdestabilizing both management and the
board roomand thereby disrupting, if not causing the failure of, the Companys efforts to pursue
strategic options;
e. utilizing Liberations stockholder proposals, regardless of whether they are passed or
later invalidated by this Court as illegal, to undermine the authority and effectiveness of the
Companys leadership at this critical juncture in Ballys life cycle; and
f. preventing Ballys public stockholders from obtaining the opportunity to receive a control
premium from Liberation, Pardus, or any other party or group seeking to obtain a control position
in or to acquire the Company.
11. Through these counterclaims, Bally now seeks a declaratory judgment that the Plan was
validly adopted and is enforceable according to its terms. Bally further seeks a judicial
determination of whether Liberation and Pardus have acted in concert and whether their actions have
resulted in (1) the occurrence of a Trigger Event under the Plan, and/or (2) the Liberation
Entities and Pardus Entities becoming interested stockholders within the meaning of Section 203
of the DGCL.3
|
|
|
3 |
|
It should be noted that, for purposes of the Plan, this Counterclaim (and any brief, memorandum or other filing by the Company in connection herewith unless specifically so stated in such filing)
is not and does not constitute (and is not intended to constitute) a public (Continued) |
-13-
II. PARTIES AND RELATED ENTITIES
12. Counterclaimant Bally is a Delaware corporation with its principal place of business in
Chicago, Illinois. The Company is engaged in the business of owning and operating fitness centers
nationwide.
13. Counterclaim Defendant Liberation is an affiliated group of hedge funds, which admittedly
operates in the manner of corporate raiders of the 1980sit identifies undervalued companies and
seeks to take effective control of them without paying a control premium by engaging in various
tactics, including proxy fights. (Compl. ¶ 15.)
14. Counterclaim Defendant Emanuel R. Pearlman is the General Manager, Chairman, and CEO of
Liberation Investment Group LLC, which is the general partner of Counterclaim Defendant Liberation
Investments, L.P. and an investment advisor to Counterclaim Defendant Liberation Investments, Ltd.
Ballys former CEO, Lee Hillman, and Counterclaim Defendant Don R. Kornstein are founding investors
in Liberation.
15. Liberation and Pearlman are beneficial owners of approximately 4.4 million shares of Bally
stockroughly 12% of the outstanding shares. In the past twenty-four months, Liberation
Investments, L.P. has bought and sold roughly $3.7 million of the Companys debt securities.
16. From 1990 to 1996, Pearlman worked for Bally Manufacturing, later known as Bally
Entertainment. The Company was a wholly owned subsidiary of Bally Entertainment
|
|
|
|
|
announcement by the Company that (i) the Counterclaim Defendants (or any other person or persons), alone or collectively, constitute an Acquiring Person or that a Shares Acquisition Date has occurred (as such terms are defined in the Rights Plan), or (ii) discloses or is intended to disclose information which reveals or is intended to reveal the existence of an Acquiring Person, and nothing in this Counterclaim (or in any brief, memorandum or filing by the Company in connection herewith unless specifically so stated there to the contrary) should be construed and is not authorized by the Company to be construed to the contrary. |
-14-
before 1995, when
the Company was spun-off and had its own public offering. Pearlman also served as a financial
advisor to the Company for most of the period from 1993 through 2003.
17. As part of his compensation as an employee-consultant to the Company, which amounted to
millions of dollars including fees for now-failed acquisitions, Pearlman was granted 35,000 shares
of restricted stock under the Companys Long Term Incentive Plan, which vested upon Liberations
acquisition of more than 10% of the Companys outstanding shares.
18. Pearlman, like the Liberation Entities he controls, is an acknowledged corporate raider,
protégé of greenmailer Asher Edelman, and had been involved in numerous corporate takeover
attempts during and since the 1980s. He has frequently used proxy contests and other coercive
techniques to force companies either to accede to his demands or face management and board
replacement. As described below, Pearlman, individually and through Liberation, has repeatedly
employed similar tactics against Bally, such as:
a. threatening a proxy contest in 2004 over four separate stockholder proposals in order to
compel redemption of the Companys prior stockholder rights plan, in order to advance his personal
financial interest in the vesting of his restricted shares and to facilitate Liberations
accumulation of a large block of Bally stock;
b. harassing management and the Board with eleven letters and three separate lawsuits over the
past 18 months, intended to disrupt the Herculean efforts of the Company to complete the financial
restatements necessitated by errors of the prior management that had retained Pearlman and
irresponsibly and falsely try to shift responsibility to current management which had terminated
him;
c. threatening a proxy contest to replace the incumbent Board at the upcoming stockholder
meeting on January 26, 2006a threat that was withdrawn after Pardus agreed to nominate Pearlmans
long-time business associate, Kornstein, as its own candidate to
-15-
replace Langshur, who is a
recently-appointed independent director and Chairman of the Companys Audit and Special Demand
Evaluation Committees.
19. Counterclaim Defendants Pardus Entities are also an affiliated group of hedge funds
comprised of Pardus European Special Opportunities Master Fund L.P., (the Fund); its investment
manager, Pardus Capital Management L.P., (Pardus L.P.); and Pardus Capital Management LLC,
(Pardus LLC), the general partner of Pardus L.P.
20. The Fund is a limited partnership formed under the laws of the Cayman Islands in February
2005, and is the holder of record of approximately 5,500,000 shares of stock of the Company. The
Fund is also the direct holder of $10.5 million principal amount of the Companys 9.75% Senior
Subordinated Notes.
21. Pardus L.P. is a Delaware limited partnership formed in February 2005, and serves as the
investment manager for the Fund. As such, Pardus L.P. is the beneficial owner of the shares of the
Company held by the Fund. Pardus L.P. possesses sole power to vote and to direct the dispositions
of all shares held by the Fund.
22. Pardus LLC is a Delaware limited liability company formed in February 2005, and is the
general partner of Pardus L.P.
23. Counterclaim Defendant Karim Samii is a principal and co-founder of Pardus L.P. and is the
sole member of Pardus LLC and, in such capacity, acts as a portfolio manager of the Fund. Prior to
co-founding Pardus, Samii was an executive with W.R. Huff Asset Management (W.R. Huff), another
hedge fund.
24. Counterclaim Defendant Joseph Thornton is a co-founder and Chief Operating Officer of
Pardus L.P. Prior to co-founding Pardus with Samii, Thornton also was an executive with W.R. Huff.
-16-
25. Pardus has not made any filings under the securities laws concerning ownership of the
shares of any public company other than Bally. In its 13D and 14A filings with respect to Bally
and in its communications with the Company, Pardus has ostensibly claimed that its intentions are
to work with the current management to enhance stockholder value, to obtain more than 15% of the
Companys stock, and to nominate directors. In reality, Pardus seeks to gain control of the
Company for its own financial interests and at the expense of other stockholders.
26. Counterclaim Defendant Kornstein has been nominated as a director by Pardus upon the
sponsorship of Counterclaim Defendant Pearlman. While Kornstein has no prior relationship with
Pardus, he is a close, long-time business associate of Counterclaim Defendant Pearlman. Kornstein,
who served as a Senior Managing Director and head of Bear Stearns gaming industry group, became
well-acquainted with Counterclaim Defendant Pearlman by no later than 1988, when Kornstein and Bear
Stearns assisted Pearlman and Pearlmans investment partnership, Gemini Partners, in an unsolicited
attempt to take over trucking company Arkansas Best. When Kornstein left Bear Stearns to become
CEO of Jackpot Enterprises, Inc. (a gaming equipment manufacturer and operator) he hired his friend
Pearlman as a consultant. In 2002, when Hillman and Pearlman attempted to sell the Company to
HealthSouth (at which Hillman soon thereafter became a director) in a stock-for-stock merger (a
transaction that would have resulted in Hillman and Pearlman receiving significant cash and other
benefits), Hillman proposed that the Bally Board be expanded to include Pearlman and Kornstein in
hopes of pushing the transaction through. After Hillman and Pearlman left Bally, Hillman and
Kornstein joined Pearlman as founding investors of Liberation to continue their corporate raiding
activities in general and to liberate Bally in particular. In 2003, Counterclaim Defendant
Pearlman nominated his two friends Kornstein and Hillman to the board of directors of InterTAN,
Inc., an electronics retailer and target of another proxy contest mounted by Liberation. Until
Liberation
-17-
apparently entered into the agreement with Pardus whereby Pardus would nominate
Kornstein as part of Pardus slate of directors, Bally would not have expected to see Kornstein put
forward as a candidate by anyone other than Liberation or Pearlman himself.
27. Third Party Lee S. Hillman is Ballys former CEO. Following his departure from the
Company, Hillman founded Liberation Investment Advisory Group LLC. Since leaving Bally, Hillman
has served on various boards of directors, including HealthSouth Corp., to which Hillman had tried
to sell the Company shortly before his departure, and RCN Corp., where he serves as a director
along with James F. Mooney, whom Pardus had originally sought to nominate instead of Kornstein.
III. SUBSTANTIVE ALLEGATIONS
A. Bally Under Hillmans Management
28. Since as early as 1996, Pearlman has served as a trusted advisor to and supporter of
Hillman, Ballys now discredited former President and CEO. At Hillmans direction, Pearlman was
retained as a highly compensated financial and business consultant to the Company during periods
that have now been restated due to significant accounting errors. The improper accounting included
entries associated with transactions for which Pearlman had been the Companys principal financial
advisor.
29. Hillman rewarded Pearlman richly by directing Bally to pay him millions of dollars in
employee-consultant fees and restricted stock grants. In addition, Pearlman advised Bally to
engage in significant acquisitions, and to incur substantial debt to finance those acquisitions,
for which Pearlman received more than $1 million in fees. During Hillmans reign, he rewarded
Pearlman with restricted stock under Ballys Long Term Incentive Plan. Under the terms of its
issuance, the restricted stock would vest upon a change of control in the Company
-18-
defined to
include acquisition by any person or group of more than 10% of the Companys outstanding stock.
30. In 2002, Hillman proposed to the Bally Board that the Company be sold to HealthSouthjust
months before HealthSouths accounting fraud became public, its stock was delisted, and its CEO was
fired. The transaction would have had managements stock options purchased by HealthSouth for
cash, while other Bally stockholders were to receive HealthSouth stock. The key financial advisor
to Bally and Hillman on that proposed transaction was Pearlman.
31. When the Bally Board balked at Hillmans request to sell the Company to HealthSouth,
Hillman attempted to put two of his friends on Ballys BoardPearlman and Kornsteinin an effort to
push through that proposal. The Board refused to add either candidate.
|
B. |
|
Hillmans Departure, Ballys Weakened Condition, and Pearlmans Attempts to
Control Company Management |
32. Hillman left the Company at the end of 2002, and the Board replaced him, naming Paul
Toback as Ballys President and CEO.
33. As a result of incorrect accounting that took place under Hillmans management, Bally has
had to restate financial statements spanning a period of several years. In 2005, an independent
investigation concluded that Hillman and another former officer of Bally were responsible for
multiple accounting errors and creating a culture within the accounting and finance groups that
encouraged aggressive accounting at Bally. The Company has suspended further payments to Hillman
and the other officer under their respective severance agreements.
34. Since the ouster of Hillman from his position as Ballys CEO, Pearlman, through
Liberation, has waged a relentless, and strangely personal, campaign against the Bally management
and Board members that replaced his long-time personal friend and business
-19-
collaborator; against
the management that discontinued Pearlmans highly lucrative consulting work for Bally; against the
management that guided the Company through an internal investigation and financial restatement
necessitated by Hillmans mismanagement.
35. Toward the end of Pearlmans consultancy with the Company, he founded Liberation
Investment Group LLC. Pearlman, Kornstein, and Hillman quickly began their work together.
Kornstein and the Lee S. Hillman Revocable Trust were initial investors in and retain their
interest in Liberation entities. Both served as insurgent nominees in Liberations first
destabilization campaign against InterTan, Inc., a campaign launched only months after Hillman and
Pearlman were no longer with Bally. In addition, Hillman has served as an investment advisory
consultant to various Liberation entities. Shortly after Hillmans departure from the Company, he
founded Liberation Investment Advisory Group LLC.4
|
C. |
|
Redemption of Ballys Prior Stockholder Rights Plan and the Resulting
Personal Benefit to Pearlman |
36. In June 2004, Liberation notified Bally that it intended to present certain proposals for
the stockholders consideration at the 2004 Annual Stockholders Meeting. The proposals included
one that would cause Bally to redeem its then-existing stockholder rights plan, which had a 10%
trigger. Upon redemption, a stockholder or group of stockholders would be permitted to accumulate
a 10% or greater interest in the Company without prior Board approval.
|
|
|
4 |
|
Pearlman contends the similarity in the funds names is purely coincidental and that the funds are wholly unrelated. Because the Liberation entities are private hedge funds, which operate without even the most basic disclosure requirements, the full extent of the participation by Pearlman, Hillman, and Kornstein and the true nature of the interrelationships among the various Liberation entities is not publicly available. Thus, like so many other amazing coincidences asserted by Liberation, Bally, its stockholders, and the Court are expected to accept the cats word that, There never was any canary in that cage. |
-20-
37. In Schedules 13D filed with the SEC on June 8 and July 13, 2004, Liberation, while
generally reserving the right to change its mind and buy or sell shares of Bally stock, disavowed
any current intention to accumulate further shares of Bally.
38. On July 12, 2004, Bally announced that it voluntarily would redeem its then-existing
rights plan, subject to the terms of a newly adopted Stockholder Rights Plan Policy, agreed to by
Liberation, which gave the independent directors the ability to adopt another rights plan if it
determined that doing so was in the Companys stockholders best interests. Under the Stockholder
Rights Policy, any rights plan created by unilateral action of the independent directors would
require stockholder approval within nine months of adoption.
39. Liberation began a creeping acquisition of Bally stock through open market purchases
shortly after Ballys redemption of its prior rights plan, and contrary to Liberations
contemporaneous statements regarding its intentions.
40. With each additional accumulationon repeated occasionsLiberation (continuing to reserve
the right to change its mind) again announced that it had no present intention or plan to acquire
additional shares.
41. By May 6, 2005, Liberation had more than doubled its Bally holdings, accumulating almost
12% of the Companys outstanding sharesand in doing so, triggered the vesting of more than one
million restricted shares that had been awarded to Pearlman and others under the Long Term
Incentive Plan.
|
D. |
|
The Company Considers Adopting a Rights Plan |
42. In addition to Liberations creeping acquisitions, by August 2005 other hedge funds had
made sizeable accumulations, seeking to capitalize on Ballys depressed stock price and the lack of
information available to the Companys public stockholders due to its inability to issue financial
information during the ongoing restatement process.
- 21 -
43. At a meeting held on August 7, 2005, the Board noted recent actions by certain of its
debtholders and the continued concentration of ownership of the Companys shares were causing
concerns about possible abuses through further aggregations. Accordingly, the Board determined to
evaluate whether readoption of a rights plan might be in the best interests of its stockholders.
The Boards concerns would be heightened when a new significant hedge fund became, in a matter of
weeks, Ballys largest stockholderand with large demands.
|
E. |
|
Pardus Suddenly Emerges As the Companys Largest and Most Demanding
Stockholder |
44. In August 2005, Bally received several calls from Pardus indicating that they had
purchased some of the Companys debt securities. Prior to these calls, no one at Bally had heard
of Pardus or its principals.
45. In September 2005, with no prior warning, Pardus filed its first 13D indicating that it
held approximately 6.4% of the Companys stock. At a Board meeting on September 8, 2005, it was
noted that Pardus had filed an amended 13D indicating share ownership of approximately 12%, making
it the Companys largest single stockholder.
46. On September 13, 2005, at Pardus request, Mr. Toback first met with Pardus principals.
At this meeting, Pardus requested that Bally consider appointing Charles Burdick, one of its
advisory board members, and David VanValkenberg as candidates to fill existing vacancies. Within
the next ten days, Pardus proposed two additional candidates: James Mooney and Barry Elson, a
colleague of Burdicks.
47. By the September 15, 2005, Board meeting, at which Pardus suggestions were discussed,
Pardus had increased its stake to 13%. The Board requested information on recent hedge fund
activism and efforts to influence or take control of a public company and determined to consider
possible courses of action in response to Pardus rapid accumulations.
- 22 -
48. On September 22, 2005, the Board met again and noted that Pardus had purchased additional
shares. The Board noted that ownership of more than half of the Companys stock was highly
concentrated in the hands of a relatively small number of hedge funds and arbitrageurs and
requested additional information about hedge funds and their efforts to increase ownership in and
influence over a public company.
49. At a September 27, 2005 meeting with management, Pardus also stated that it might be
interested in leading a recapitalization transaction if the provisions of §203 were waived.
50. As of September 28, 2005, Pardus had recommended four director candidates to Bally:
Charles J. Burdick, Barry Elson, David Van Valkenburg, and James Mooney. Pardus advised Bally that
it did not want to be given lip service and that it was prepared to take matters to the next
level. Pardus also advised Bally that it had spoken with Pearlman and had advised Pearlman of its
three director candidates. However, Pardus stated that it had no agreement with Pearlman
whatsoever. The next day, Pardus advised Bally that its candidate Mr. Mooney was too busy to serve
as a director of Bally and that Pardus was therefore withdrawing his name from consideration, but
that it had an alternative candidate that it was considering to replace him. However, Pardus did
not advise Bally who that alternative candidate was.
51. On September 29, 2005, the Board met again and focused its attention on strategic issues
facing the Company and in particular on Pardus request that the Company waive the protections of
DGCL § 203 and the obvious interest in a takeover of the Company implied by that requests. The
Board considered its fiduciary duties in light of these developments and again requested
information concerning insurgent stockholders in general or hedge funds in particular, that had
sought to increase ownership in and influence over a public company.
- 23 -
52. At the September 29, 2005 meeting the Board expressed concerns that the large stock
holdings by activist hedge funds might result in the funds putting forth their own agenda, which
might not be in the best interests of the other stockholders. The Board noted that the provisions
of DGCL § 203 do not prevent the acquisition of shares, but only a subsequent business combination
or other interested transactions without the approval of two-thirds of the Companys other
stockholders and thus provided an important protection for minority stockholders. The Board felt
that a waiver should not be granted, particularly without first obtaining some beneficial agreement
or concession from the stockholder making the request.
53. In light of these developments, the Board also considered the advisability of adopting a
stockholder rights plan to enable the Company to negotiate with a would-be acquirer to maximize
stockholder value and/or deter abusive efforts to obtain control of the Company, while not
preventing a favorable transaction. By compelling a stockholder to negotiate with the Board before
seeking to effect a change of control transaction, the Board would be in a position to seek to
protect the interests of its other stockholders as its fiduciary duties require.
54. By the end of September, Pardus disclosed that it had increased its stake in the Company
to 14.4%a staggering and staggeringly rapid accumulation given that their first 13D had been filed
at the beginning of the month.
|
F. |
|
The Board Forms a Rights Plan Committee and Resolves to Adopt the Plan |
55. At a Board meeting held on October 3, 2005, the Board expressed its continued and
heightened concerns that Pardus and other hedge funds, including well-known corporate raiders, were
engaged in creeping acquisitions of the Companys stock and were able to obtain their stakes at
depressed prices because the market lacked access to financial information about the Company as a
result of the ongoing restatement process. It was noted that an accumulator or group of
accumulators might be in a position ultimately to force a change of control and to
- 24 -
squeeze out the remaining stockholders at an inadequate price (without paying a premium for
control) and then resell control and capture the premium for itself. In addition, the Board was
concerned that without adequate defensive mechanisms in place, the Board was unable effectively to
protect stockholder interests by pursuing and implementing plans to create long term value, to
adjust the Companys capital structure, or to assure that the timing of any strategic transaction
was optimized by allowing the Company to issue its financial information, implement its business
plan, and take whatever other actions it deemed necessary or prudent to maximize the price
available to the Companys public stockholders.
56. The Board noted that Ballys stockholders were particularly vulnerable to coercive and
inadequate offers because of the unavailability of current and accurate financial information due
to the continuing audits and restatement procedures necessary to correct accounting errors fostered
by Hillmans mismanagement. Thus, Ballys stockholders were poorly situated to evaluate any
proposed transaction, having no access to current, accurate financial information and would-be
raiders were well situated to buy Ballys stock on the cheap.
57. The Board was aware that a strategic transaction or recapitalization could be necessary to
cure Ballys financial woes and was advised that the adoption of a rights plan would protect the
Boards ability to identify and negotiate the strategic transactions that would best maximize value
for all stockholders. The Board satisfied itself that a Rights Plan would not deter fully-priced
and fairly structured offers and would not deter or prevent proxy contests for control of the
Board.
58. Accordingly, at the October 3, 2005 meeting, nearly two weeks before Pardus announced its
intention to nominate a slate of candidates, the Board resolved to adopt a Plan and to create a
Rights Plan Committee to consider the specific provisions and oversee the implementation of the
Plan. The Board also determined that it was not in the best interests of
- 25 -
stockholders to accede to Pardus request that the Board waive the protections of DGCL § 203
by approving Pardus acquisition of a 15% or greater stake in the Company without triggering
Delawares statutory three-year waiting period for business combinations with interested
stockholders and noted that Pardus had not offered any accommodation or assurance in return for the
requested waiver.
59. The Rights Plan Committee, after additional consideration, voted to adopt the Plan on
October 5, 2005. The recommendation of the Rights Plan Committee was presented to and accepted by
the Board on October 6, 2005 subject to implementation by the Rights Plan Committee. After
determining that consents from certain lenders were required for adoption of the Plan (absent which
the Company, by adopting the Plan, might be deemed to breach certain covenants in the Companys
credit agreement), the Rights Plan Committee deferred final action until the necessary consents
could be obtained. Thereafter, the Company began to solicit consents from the lenders under its
credit agreement.
60. On October 17, 2005 the Rights Plan Committee voted for final approval of the Plan, to be
implemented immediately upon receipt of the final lender consent. The last of those consents was
obtained on October 18, 2005. That same day the necessary documents were executed, and the Plan
was formally announced.
61. The Plan defines an Acquiring Person as including any person or group that becomes the
beneficial owner of 15% or more of Ballys outstanding stock. Beneficial ownership is defined to
aggregate all shares beneficially owned by any group of individuals and entities that has any
written or unwritten agreement, arrangement or understanding related to acquiring, holding,
voting, or disposing of Bally stock. Upon a determination that a stockholder or group of
stockholders has become an Acquiring Person, Rights are issued to stockholders (other than
Acquiring Persons) that enable the stockholders receiving the rights to exercise them
- 26 -
and purchase $26 of Bally stock for the Rights exercise price of $13. At recent trading
prices in the range of $6.50 per share, each Right would entitle the holder to purchase four
additional shares at $3.25 per share or half the market price.
62. Consistent with the July 2004 Plan Policy, which was agreed to by Liberation at the time
it was adopted, and which is incorporated into the terms of the newly adopted Plan, the Plan will
expire if not approved by stockholders before July 15, 2006, but it may earlier be redeemed or
terminated by the Company.
63. After the adoption of the Plan was announced, Liberation applauded the Boards action,
noting that the Plan would prevent an acquirer from obtaining control of the Company at an unfair
price.
|
G. |
|
The Record Refutes Plaintiffs Allegations that the Plan Was Adopted in
Order to Prevent Liberation and Pardus from Filing a Joint Slate |
64. As noted above, soon after Pardus filed its first 13D in September 2005, it began to
recommend candidates to fill existing vacancies on Ballys Board. At the time the Plan was
adopted, the only candidates Pardus had identified were its advisory board member Charles Burdick,
James Mooney (who subsequently withdrew), David Van Valkenburg, and Barry Elson.
65. On October 17, 2005, Pardus filed a Form 14A announcing its intention to nominate a slate
of three insurgent candidates for election as directors at Ballys stockholder meeting scheduled
for January 26, 2006. No individual nominees were named. On October 24, 2005, Pardus filed a
Schedule 13D attaching a letter to the Board, indicating that it was considering additional
candidates but without naming any of them. In that letter, Pardus complained about the adoption of
the Rights Plan. However nothing in that letter or in any of Pardus public filings to that date
or in any of their prior communications with management or the Board suggested that Pardus had any
intention to nominate any candidates that might be affiliated with any other stockholder or to work
together with any other stockholder in
- 27 -
connection with the solicitation of proxies, the making of stockholder proposals or in any
other way.
66. On October 18, 2005, Bally advised Pardus that it had retained an executive search firm to
assist in the process of identifying director candidates, and invited Pardus to have its nominees
work with the search firm and with the Boards Nominating and Corporate Governance Committee.
|
H. |
|
Pardus and Liberation Secretly Join Forces |
67. In various 13D filings from December 2004 through October 2005, Liberation disclosed its
intention to nominate its own slate of directors at Ballys annual meeting.
68. At some point after the adoption of the Plan, but unbeknownst to Bally or its other
stockholders, Counterclaim Defendants apparently came to realize that their independent efforts to
mount separate proxy contests and to slate competing candidates might counteract and dilute their
common objective of destabilizing Bally and thereby obtaining influence and control over the
Company and its strategic alternatives process. Accordingly, Liberation and Pardus apparently
secretly agreed to join forces.
69. Pardus agreed that it would include Kornstein, a long-time Pearlman loyalist, a Liberation
investor, and one of Liberations planned nominees, on Pardus director slate, instead of one of
the other individuals Pardus had previously demanded that Bally appoint to fill open positions or
nominate for election to the Board. In exchange, Liberation agreed to vote its own shares and
those for which it received proxies in favor of the Pardus slate.
70. Pardus and Liberation apparently further agreed that Liberation would sponsor and Pardus
would support (by voting shares it owned and those for which it obtained proxies) stockholder
proposals seeking to depose Ballys current CEO and Chairman. The Liberation proposals would serve
both as a foil to destabilize the Company, the Board, and the strategic
- 28 -
process initiated by Ballys independent directors and as a means to obtain support of
Kornsteins and Pardus other nominees candidacy by suggesting that current management is
inadequate so that both groups can accomplish their mutual goals of wresting control of the Company
away from current management and the Board.
71. On October 26, 2005, Pardus advised the Company that it had 5 candidatesnone besides
Elson and Burdick were namedthat it would propose for election and to fill the existing vacancies
on the Companys Board. In other words, although Pardus owned 14% of the Companys shares, it was
suggesting that it be permitted to seat a majority of the Companys Board.
72. On October 28, 2005, Bally received from Russell Reynolds, its recruiting consultant,
copies of biographies of four possible candidates recommended by Pardus for consideration for
election to Ballys Board. Don Kornsteins name was among the candidates. Before this
communication, Bally had no indication that Pardus had any relationship to or would seek or support
the election of Mr. Kornstein, a candidate closely affiliated with Pearlman. When Bally later
questioned Pardus about their suggestion of Kornstein, they elicited the truth that Pearlman had
suggested Kornstein to Pardus.
73. On November 1, 2005, in conversations with management, Pardus again indicated that they
had five independent directors who they believed Bally should appoint or nominate for election,
thereby giving their candidates majority representation on the Board (even though Pardus held only
14.4% of Ballys outstanding stock).
74. Pardus subsequently told Bally that it wanted to have three of its candidatesincluding
Kornstein installed on the Board immediately, and to put two others up for election at the January
26, 2006 meeting. Pardus five candidates were Kornstein, Elson and Burdick, along with David Van
Valkenburg, and Thomas Albani.
- 29 -
75. Ultimately, the Board agreed to, and did, consider all five of Pardus candidates as part
of a search process conducted by its nominating committee (with the assistance of independent
consultants) to identify the best-qualified individuals to fill the existing vacancies and for
possible nomination for election at Ballys annual meeting of stockholders. Bally interviewed
Kornstein as part of the process as well.
76. On November 17, 2005, Pardus formally announced its nomination of Burdick, Elson, and
Kornstein for Ballys Board of directors.
77. After Pardus nominated Liberations suggested candidate Kornstein, Liberation declined
to follow through on its previously announced intention to nominate its own slate of director
candidates.
|
I. |
|
Liberations Stockholder Proposal and Its Insidious Functions |
78. A few days later, on November 21, 2005, Liberation sent Bally notice of its intent to
introduce the Stockholder Proposal at the Annual Meeting. According to Liberation, If adopted,
the [Stockholder] Proposal would (i) amend the . . . Bylaws . . . to afford stockholders the right
to remove the Chief Executive Officer and President upon the affirmative vote of a majority of the
Companys stock[holders]; (ii) prevent the Board of Directors of the Company from acting
unilaterally to amend the Bylaws to eliminate the stockholder authority described in clause (i);
and (iii) remove [Ballys] current Chief Executive Officer and President Paul A. Toback from
office, effective immediately.
79. Liberation is currently seeking stockholder support for the Stockholder Proposal and seeks
to have the Stockholder Proposal presented at Ballys upcoming Annual Meeting.
80. As set forth in separate litigation filed by Bally in this Court on December 5, 2005, the
Stockholder Proposal contravenes controlling Delaware law and the Companys Certificate of
Incorporation which state that [t]he business affairs of the Corporation shall be
- 30 -
managed by or under the direction of the Board of Directors5 and that the Board
of Directors shall have the power to make, adopt, amend, change or repeal the Bylaws of the
Corporation by resolution adopted by the affirmative vote of a majority of the entire Board of
Directors.
81. In soliciting proxies and stockholder support for the Stockholder Proposal, Liberation has
been directly attacking the current directors (including on matters unrelated to its proposals),
even though it professes not to be soliciting against their election. Thus, Liberations proposal
serves the purpose of promoting insurgent director candidate Kornsteins bid for election to the
Bally Board of directorseven if the proposal is rejected by stockholders or ultimately invalidated
by this Court.
82. Pardus has not taken any position as to the Stockholder Proposal in its most recent proxy
filings but is seeking discretionary authority to vote to support the Stockholder Proposal once
they decide.
83. The Stockholder Proposals will help Liberation accomplish its goal of destabilizing
management and the Board. That destabilization will satisfy Pearlmans self-serving interest in
exacting revenge for his friend and Liberation investor, Hillman, and it will facilitate
Liberations desire to accumulate additional Bally stock at the expense of stockholders generally
when the Company is unable to complete its strategic alternatives efforts. Pardus, too, will
benefit from the destabilization effects of the Liberation proposal, which will help Pardus to
inject into the boardroom three loyal directors who will be willing to approve Pardus acquisition
of ever larger stakes in the Company without paying the control premium due to the other
stockholders.
|
|
|
5 |
|
8 Del. C. § 141(a); see also Ballys Certificate of Incorporation. |
- 31 -
|
J. |
|
Bally Files a Lawsuit That Forces Liberation, and Then Pardus, to Admit
Some of the Facts Demonstrating That They Are Acting in Concert, but Liberation
Prevents Further Inquiry by Means of Further Incomplete and Misleading Disclosure |
84. In response to significant evidence that Liberation and Pardus had entered into
arrangements, understandings, or agreements to support each others proposals, Bally, soon after
filing its restated financials and announcing its intention to pursue strategic alternatives, filed
a lawsuit against Liberation in the United States District Court for the District of Delaware
challenging the misleading disclosures in Liberations 13D and proxy materials, including its
failure to disclose that it was acting in concert with Pardus to support Kornstein, to defeat
Ballys candidates and proposals, and to support the Stockholder Proposal (the Federal Proxy
Litigation).
85. Pardus and Liberation, collective owners of approximately 26% of Ballys outstanding stock
realized at this point, if not before, that if it were discovered that they had entered into
arrangements, understandings, or agreements with respect to Ballys stock they may have triggered
the Plan, and the issuance and subsequent exercise of Rights by the other stockholders would
substantially dilute Pardus and Liberations interest, thwarting their plan to seize effective
control of the Company.
86. Accordingly, on December 11, 2005, Liberation filed this lawsuit.
87. In order to prevent discovery into the question of whether Liberation and Pardus were
acting in concert as an undisclosed 13D group, Liberation amended its SEC filings and disclosed
certain information concerning its relationships with Kornstein, admitted that it had recommended
Kornstein to Pardus and disclosed the fact of Ballys contentions, but denied the ultimate fact,
that Liberation and Pardus had entered into one or more arrangements, understandings or agreements
to support Kornstein and Liberations Stockholder Proposal. Liberation then sought dismissal of
the order granting expedited discovery in the Federal Proxy
- 32 -
Litigation, which was about to commence, and the preliminary injunction proceedings set for
hearing on January 11, 2006.
88. By an opinion dated December 22, 2005, the District Court granted Liberations motion,
determining that Liberations disclosure of the existence of the good faith dispute concerning
Ballys group allegations mooted the need for preliminary injunctive relief. The matter remains
pending subject to its ultimate resolution on the merits. Bally has filed a notice of appeal with
respect to that ruling.
|
K. |
|
The Overwhelming Evidence Supports the Conclusion That Pardus and
Liberation Are Acting in Concert |
89. Bally has strong circumstantial evidence that Liberation and Pardus are in fact acting as
an undisclosed group and are supporting each others efforts. Indeed, recently, Pearlman was
bold enough to lobby one of Ballys sitting directors about the wisdom of supporting Pardus
proposed slate. Bally is informed and believes that similar conversations have taken place between
Liberation and/or Pardus and certain of Ballys other stockholders.
90. As noted above, Ballys belief is supported by Liberations and Pearlmans own admissions,
which were forced by Ballys litigation efforts in federal court. After Bally brought the Federal
Proxy Litigation, Liberation belatedly admitted facts pointing to the existence of their group
action with Pardus, including that:
a. Don R. Kornstein, one of Pardus director nominees, was suggested as a possible
candidate by Mr. Pearlman. (a fact also belatedly admitted by Pardus in its SEC
filings);
b. During the 17 years of their acquaintance, Mr. Pearlman has been involved in
a few business relationships with Mr. Kornstein. In 1988, while Mr. Kornstein was a
senior managing director at Bear Stearns, the firm was retained by Mr. Pearlman in
connection with an unsolicited bid for Arkansas Best. Mr. Pearlman, on the other hand,
was retained by Jackpot Enterprises, Inc. to advise on a single mergers and acquisitions
deal during Mr. Kornsteins tenure as an officer and director of the company from 1994
to 2000.
- 33 -
c. In 2003, Mr. Pearlman nominated Messrs. Hillman and Kornstein for election to
the Board of Directors of another company, namely, InterTan, Inc., in a proxy
contest which ultimately resulted in settlement.
d. Currently, Mr. Pearlman has no business relationship with Mr. Kornstein, other
than the small investment that Mr. Kornstein and his wife have jointly made in
Liberation Investments, L.P., which investment represents no more than 0.38% of the
capital of Liberation Investments, L.P., and no more than 0.26% of the aggregate capital
of both funds.
e. Mr. Pearlman maintains a personal relationship with Mr. Hillman, the former
Chief Executive Officer of the Company.
f. The Lee S. Hillman Revocable Trust is currently a small limited partner in
Liberation Investments, L.P., whose investment represents no more than 0.38% of the
capital of Liberation Investments, L.P. and no more than 0.26% of the aggregate capital
in both funds.
91. Moreover, Ballys belief that Liberation and Pardus are acting in concert to support
Pardus slate is supported by abundant additional circumstantial evidence, much of which is
outlined above and which, in combination with Liberations admissions, reflects either deliberate
concerted action or a level of coincidence worthy of a Thomas Hardy novel. Such evidence includes
inter alia that:
a. Liberation suddenly abandoned its stated intention to slate its own candidates, and
decided not to run any directors after Pardus accepted Liberations suggestion that they
include Kornstein, Pearlmans old friend and colleague, on Pardus slate.6
b. Liberation, in soliciting support for its Stockholder Proposal has also sought to
solicit the authority to vote for the Pardus slate.
c. Pearlman has openly called stockholders and even Ballys sitting directors, urging
them to vote for Pardus candidates.
d. Pearlman has made numerous public filings attacking Ballys sitting directors, an
effort irrelevant to the purposes of the Stockholder Proposal, i.e., removing the CEO,
which can only be meant to garner support for the election of new directors, i.e., those
proposed by Pardus.
|
|
|
6 |
|
Yet incredibly, Liberation stated in its
securities filings that it had not decided whether or not it will vote for
Kornsteinits former nominee, its current investor, and the longtime
crony of its principal, whom Liberation itself suggested to
Pardus. |
- 34 -
e. On its proxy card, Pardus has sought discretion from stockholders to allow Pardus to
vote for the Liberation proposals.7
92. In addition, Liberations actions in filing this lawsuit seeking a declaration that the
Companys Stockholder Plan is invalid on the ground that it precludes stockholders who collectively
own more than 15% of the Companys shares from entering into an agreement with respect to those
shares is itself strong evidence of concerted activity. (Complaint, Exhibit D, at ¶¶ 5, 8.) Such
a declaration matters only if Liberation and Pardus and/or others already have entered, or intend
to enter into such an agreement. The Complaint betrays Liberations concern that they have taken
actions beyond merely suggesting Mr. Kornstein to Pardus, and thus may have triggered the
Planotherwise, why file the suit? The Complaint correctly asserts that Bally confirmed that
suggesting the names of possible directors would not trigger the Pill, and then protests that
there is no agreement between Liberation and Pardus. If this were true and all that Liberation
has done is to suggest a friend without any understanding that they would support him, why is
Liberation seeking an order from the this Court enjoining Bally from triggering the Plan against
Liberation or any other stockholder claimed by Liberation to be acting in concert with it? Id. at
p. 12 (prayer for relief).
93. In fact, Liberation lay bare that it was seeking support for Pardus slate, contrary to
its avowed neutrality, when in early December 2005, Pearlman telephoned Eric Langshur, an incumbent
member of Ballys Board who is up for re-election at the Annual Meeting. Pearlman asked Langshur,
in words or effect: Why wont you endorse Pardus proposal for three directors? Whats wrong
with you guys? You should just go along with Pardus three. Other stockholders have reported
similar conversations.
|
|
|
7 |
|
Pardus has, similar to Liberation, disingenuously
demurred in its proxy statement as to how it intends to exercise such
discretion. |
- 35 -
94. The most recent coup de grâce is that while Liberation continues to disclaim support for
any candidate, it has recently commenced soliciting proxies via a proxy card that includes the
names of only the three Pardus nominees, Messrs. Burdick, Elson and Kornstein. Liberation explains
that it has provided this card for the convenience of stockholders, and that it had intended to
name all expected director nominees, but that it was forced to omit the name of Ballys candidate
Eric Langshur (the chair of the Audit Committee who led Bally through its restatement process)
because it did not receive his consent and thus it was prohibited from including him on its card.
95. In reality, Liberation did not obtain Mr. Langshurs consent because it made a deliberate
effort to avoid giving him the opportunity to consent. On December 8, 2005, Liberation included
Mr. Langshur as a director nominee on the proxy card included in its Preliminary Proxy Statement.
Despite its professed intent to include all expected director nominees on its card, Liberation
let more than two weeks pass before finally getting around to requesting Mr. Langshurs
consentwhich Liberation did by letter dated December 23, 2005.
96. Although Ballys Proxy Statement included Mr. Langshurs business address, and stated that
Bally is the business address for Bally officers only, Liberation sent its request for consent to
Bally, not to Mr. Langshur. The letter listed Mr. Langshur as the last of six addresseesMessrs.
Burdick, Elson and Kornstein and Messrs. Burdick, Elson and Langshurnone of whom use Bally as
their business address. Not surprisingly, the letter was not received at Bally until after the
Christmas holidays and the method of addressing caused further delay in its delivery to Mr.
Langshur.
97. Although Liberation knew it was the Christmas holidays (and that Ballys and Mr.
Langshurs offices were likely closed), and despite the fact that Pearlman had directly contacted
Mr. Langshur many times in the past, Liberation made no effort to call Mr. Langshur directly.
- 36 -
Instead, at 11:00 p.m. on December 26, 2005a federal holiday, when Mr. Langshur was on
vacation with his familyLiberation faxed a copy of the letter to Mr. Langshurs business address
asking for Mr. Langshurs consent no later than December 28, 2005.
98. Liberation then mailed a proxy card that included only Pardus candidates, including
Liberations suggested candidate, Mr. Kornstein. To add insult to injury, Liberation misleadingly
intimated that Mr. Langshur was not included because he had refused to consent, stating that we
did not receive the consent of Eric Langshur to be named . . . Furthermore, Mr. Langshur did not
confirm to us that he would serve on the Board of Directors if elected.
99. Liberationwhich is well-acquainted with proxy contests and knows that consent must be
obtainedthus engaged in a circuitous process that was designed to fail. By virtue of this last of
many deliberate subterfuges, Liberation has now included a proxy card that presents stockholders
with the option only of voting for Pardus candidates(along with its own invalid proposal)while
disclaiming any intention to support any candidates at all and disclaiming that Pardus and
Liberation have agreed to act in any way to support each others candidates and proposals.
100. Similarly, Pardus has disingenuously demurred as to how it intends to exercise the
discretion it seeks in its proxy statement to vote on the Liberation proposals.
101. Based upon the foregoing, Bally believes there is more than ample evidence that Pardus
and Liberation have in fact entered into arrangements, understandings or agreements to support each
others candidates and proposals. Bally believes that an inquiry will provide further evidence
showing that Liberation has agreed with Pardus that (1) Pardus would slate and Liberation will
support Kornstein, (2) that Liberation would put forward the Stockholder Proposal seeking to remove
management as a foil designed to discredit management and thereby engender support for Pardus
(and Liberations) candidates, (3) in return Liberation would not suggest an alternative
- 37 -
slate; and (4) each would vote the shares of the Company stock they own, and those for which
they gather proxies, in favor of the Pardus slate and Liberations Stockholder Proposals. It
simply strains credulity to suggest that Pardusa hedge fund that had already invested millions of
dollars acquiring a substantial stake in Bally and had already suggested a full slate of candidates
to Ballydecided to change its slate to nominate someone with whom it had no prior connection as a
board representative simply because another, wholly unaffiliated stockholder made an unsolicited
suggestion that Pardus appoint that stockholders long-time loyalistlet alone that it would do
sowithout any explicit or implicit quid pro quo.
102. Instead, it makes perfect sense that Pardus and Liberation would and have been working
together to achieve their common goal of destabilizing the Company and obtaining significant stakes
without paying a premium. By working independently, they would be at cross purposes. By working
together each achieves what it wants. Both hope to turn a quick profit. Pardus clears the way to
take control. And Liberation and Pearlman exact their revenge.
IV. FIRST CLAIM FOR DECLARATORY RELIEF: THE PLAN IS VALID AND ENFORCEABLE
103. Bally repeats and realleges paragraphs 1 through 102 as if fully set forth herein.
104. Notwithstanding the rhetoric and hyperbole in Plaintiffs Complaint, the Plan adopted by
the Stockholder Plan Committee is in fact nothing more than a garden-variety rights plan. The
provision challenged by Liberation in its Complaint has long been approved by this Court and the
Delaware Supreme Court.8
105. Ballys Board of directors identified a specific threat to the Companys policies and
effectivenessan apparent creeping acquisition by Pardus, a hedge fund that had indicated its
interest in acquiring as much as 30% of the Company while retaining the option to engage in a
|
|
|
8 |
|
See, e.g., Moran v. Household Intl, Inc.,
500 A.2d 1346 (Del. 1985); Stahl v. Apple Bancorp, Inc., 1990 WL 114222 (Del.
Ch. 1990). |
- 38 -
transaction with the Company within the next three years. In addition, the Board has
recognized the Company may need to engage in certain strategic transactions or possibly a
recapitalization, in which case the Plan can provide leverage for the Board to negotiate to
maximize stockholder value.
106. The Board recognized that Pardus actions posed a threat to the other stockholdersPardus
may accumulate sufficient shares to exercise effective control without paying a control premium to
the other stockholders.
107. The Plan was a measured, rational, and non-preclusive response to the identified threats.
The Board properly took action to protect Ballys public stockholders from apparent attempts to
attain control of the Company without paying a control premium to the other stockholders and to
ensure that the Company was well-positioned to promote and to protect its stockholders interests
in the event of a change of control. Adoption of the Plan was the mildest medicine capable of
protecting the Company from the threats it faced.
108. The Company and its Board have not staunchly and blindly sought reelection of incumbents
or directors recommended by the current Board and management but rather have nominated candidates
who are mutually agreeable to the Company and to Pardus, a substantial stockholder, for a majority
of the open board positions. Election of the two Pardus candidates who are also recommended by
Bally would result in Pardus, a 14% stockholder, having seated 22% of the Board.
109. Furthermore, the objective record of the Companys actions disproves Liberations
allegation that the Plan was adopted for an improper purpose.
110. Liberations claim that the Plan was adopted in response to Pardus proxy solicitation is
based on the fact that the final papers were formally executed the day after Pardus announced its
proxy solicitation. However, as noted above, the Board on October 3, 2005, and
- 39 -
the Rights Plan Committee on October 5, 2005, voted conditionally to approve the Plan before
any stockholder announced an intention to engage in a proxy contest at the upcoming stockholder
meeting. Implementation of the Plan could not be concluded until Bally obtained consents from
certain lenders.
111. Liberations allegations concerning the Plan are devoid of substance and the record shows
that they were nothing more than a public relations tactic. Liberation is aware that the Plan was
conditionally approved before the Pardus proxy solicitation was announced. Indeed, Liberation and
its counsel were aware of that fact at the time the Complaint was filed. Yet Liberation
nonetheless alleged that the Plan was adopted in response to the Pardus proxy solicitation.
Liberation also filed its Complaint, including its misleading allegations concerning the adoption
of the Plan, as an exhibit to its federal securities filings. Liberation did so in an effort to
impugn the Company and its Board before the stockholders and thus attempt to improve its and
Pardus chances for success in the upcoming vote.
112. The Plan was validly adopted, was adopted for a proper purpose, and is currently
enforceable according to its terms.
V. SECOND CLAIM FOR DECLARATORY RELIEF AS TO WHETHER LIBERATION ACTING IN CONCERT WITH PARDUS HAS
TRIGGERED THE RIGHTS PLAN
113. Bally repeats and realleges paragraphs 1 through 112 as if fully set forth herein.
114. The Plan is triggered if any person or group becomes the beneficial owner of 15% or more
of Ballys outstanding stock. The Plan defines beneficial ownership to include shares beneficially
owned by individuals and entities that have any written or unwritten agreement, arrangement or
understanding related to acquiring, holding, voting, or disposing of Bally stock.
- 40 -
115. Liberation and Pardus collectively control approximately 26% of Ballys outstanding
common stock, with Liberation controlling approximately 12% and Pardus controlling approximately
14%. (Complaint at ¶¶ 23.)
116. Both hedge fund stockholders appear eager to exercise effective control over the
management of Bally either by controlling a sufficient percentage of the outstanding stock or by
controlling a majority of the Board of Directors.
117. Acting alone, Liberations ongoing attempts (1) to seek revenge against Ballys
management; and (2) to foster (to an even greater extent) the instability that has facilitated its
creeping acquisition at the expense of Ballys stockholders have so far been unsuccessful.
118. Pardus solo attempts to designate a majority of the Bally Board and to obtain
authorization to accumulate up to 30% of the Companys outstanding stock have also failed.
119. The two hedge funds now appear to have joined forces to facilitate further share
accumulation, to elect insurgent director candidates, and to pass stockholder proposals.
120. By apparently working together to invalidate the Plan or to seat board members who will
vote to redeem it, and by seeking to remove Toback by stockholder initiative, Liberation and Pardus
are directing their mutual efforts at destabilizing the Company, the Board, and the strategic
process initiated by Ballys independent directors.
121. By apparently working together, Pardus and Liberation ensure Kornstein will receive the
votes of no fewer than 26% of the outstanding shares. That 26% is supplemented by both hedge
funds effortsPardus proxy solicitations and Liberations promotional SEC filings, stockholder
proposals, and litigationto solicit other stockholders to vote for Kornstein, and greatly
increases his chances of election.
122. Liberation has publicly denied any coordinated efforts with Pardus or other stockholders
both in documents it has filed with the SEC and in its Complaint in this action, but
- 41 -
Liberations public statements are not credible. By stating it had no intention to accumulate
more shares, while more than doubling its holdings; by misrepresenting the contents of confidential
materials in its Complaint; and by using its SEC filings as promotional materials to attack the
Company, Liberation has repeatedly demonstrated that its statements about its Bally interests
cannot be trusted.
123. Liberations self-serving denials of an agreement with Pardus are not reliable. If
anything, the fact that Liberation has gone to such lengths to deny that it is acting in concert
with Pardus to elect Kornstein and to pass various stockholder proposals suggests that the opposite
is true, just as the opposite was true when Liberation repeatedly announced that it had no present
intention to accumulate additional Bally shares.
124. Bally seeks a determination by this Court as to whethert the parties coordinated efforts
are pursuant to an undisclosed agreement, arrangement, or understanding between Liberation and
Pardus so as to trigger the Rights Plan.
VI. THIRD CLAIM FOR DECLARATORY RELIEF AS TO WHETHER LIBERATION AND PARDUS HAVE TRIGGERED DGCL § 203.
125. Bally repeats and realleges paragraphs 1 through 124 as if fully set forth herein.
126. Section 203 prohibits business combinations with interested stockholders for a period of
three years after a stockholder acquires 15% or more of a corporations voting stock. The statute
is triggered when any person or group becomes the owner of 15% or more of a Delaware corporations
outstanding stock.
127. Shares owned include those owned by any person or group with whom the stockholder has any
agreement, arrangement or understanding related to the acquiring, holding, voting, or disposing
of shares of the company.
128. Bally seeks a determination as to whether, by the same alleged unacknowledged agreement,
arrangement, or understanding between Liberation and Pardus to vote shares they
- 42 -
own and for which they obtain proxies (1) for the election of insurgent director candidate
Kornstein and (2) for the promotion and passage of stockholders resolutions, Liberation and Pardus
have each become interested stockholders under DGCL § 203.
VII. PRAYER FOR RELIEF
WHEREFORE Bally respectfully requests that this Court enter judgment in favor of the Company and
against the Counterclaim Defendants, and grant the following relief:
(a) An order declaring the Plan was validly adopted and is enforceable according to its terms;
(b) An order declaring whether Liberation and Pardus each beneficially own (within the
meaning of the Plan) the shares of common stock held by both collectively;
(c) An order declaring whether Liberations and Pardus agreements, arrangements, and/or
understandings have caused each to become an interested stockholder, as that term is defined in
DGCL § 203;
(d) Attorneys fees and costs; and
(e) Such other and further relief as the Court deems just.
|
|
|
OF COUNSEL: |
|
|
|
|
/s/ Raymond J. DiCamillo |
|
|
|
Laurie B. Smilan
|
|
Raymond J. DiCamillo (#3188) |
Latham & Watkins LLP
|
|
Richards, Layton & Finger, P.A. |
Two Freedom Square
|
|
One Rodney Square |
11955 Freedom Drive, Suite 500
|
|
P.O. Box 551 |
Reston, Virginia 20190-5651
|
|
Wilmington, Delaware 19899 |
(703) 456-1000
|
|
(302) 651-7700 |
|
|
Attorneys for Defendants and |
|
|
Counterclaimant Bally Total Fitness |
Dated: January 9, 2006
|
|
Holding Corporation |
- 43 -
|
|
|
|
|
|
|
Contact:
|
|
BALLY TOTAL FITNESS
8700 West Bryn Mawr Avenue
Chicago, IL 60631
www.ballyfitness.com
Investors: Janine Warell, (773) 864-6897
Media: Matt Messinger, (773) 864-6850
Additional Investor Contacts:
Jeanne Carr/Dan Burch, of MacKenzie Partners
(212) 929-5916 / (212) 929-5748 |
FOR IMMEDIATE RELEASE
BALLY FILES COUNTERCLAIM AGAINST PARDUS AND LIBERATION SEEKING
DECLARATION AS TO WHETHER DISSIDENTS HAVE TRIGGERED ITS
STOCKHOLDER RIGHTS PLAN
Litigation Follows Breakdown in Settlement Discussions; Company Responds to Claims in Pardus
Most Recent Letter to Bally Shareholders
CHICAGO, January 10, 2006 - Bally Total Fitness (NYSE: BFT), the nations leader in health and
fitness, today announced that, after engaging in extensive settlement negotiations with hedge fund
Pardus European Special Opportunities Master Fund L.P. and its principals, settlement negotiations
have broken down over their unacceptable demands, forcing the Company to seek legal remedies.
Bally said that it has made a sincere effort to avoid engaging in a proxy contest with Pardus and
Liberation, another hedge fund engaged in a proxy contest with Bally. Bally said that despite its
attempts to respond to Pardus by adding two of Pardus nominees to the Bally slate, it has now
determined that it must take appropriate legal action to protect the rights of its other
shareholders in light of increasing evidence that Pardus and Liberation are working together to
wrest control of the Company without paying a control premium.
The independent directors on Ballys Board have taken extraordinary steps to reach an agreement
with Pardus and Liberation, including meeting with the principals of Pardus on two separate
occasions, said John W. Rogers, Jr., Bally Board member and Chairman and CEO of Ariel Capital
Management LLC, speaking on behalf of the Company. Despite Bally offering Pardus exceedingly fair
proposals, Pardus has not shown any willingness to reach a settlement with the Company unless their
ultimatums are accepted, and have recently indicated no further interest in discussions. As a
result, the Board has come to the unanimous conclusion that Pardus and Liberation are only
interested in advancing their own interests in gaining effective control of the Board and its
strategic alternatives process. We were left with no choice but to pursue legal actions to protect
the interests of all shareholders.
In responding to Pardus most recent letter released today, Bally commented, Its apparent from
the increasingly shrill tone and misleading statements in Pardus new filing that they are engaging
in a futile attempt to portray themselves as something other than self serving. Their latest
attempt to frighten shareholders into believing that triggering Ballys pill could result in the
Company filing for bankruptcy is a blatant falsehood.
Any triggering of the Rights Plan would be a result of Pardus and Liberations undisclosed
concerted actions to seize control. And while the triggering of the Rights Plan would dilute
Pardus and Liberation, it would inure to the financial benefit of every other stockholder and would
not adversely affect the Companys overall financial position.
Additionally, to characterize prospects for the Pill triggering as managements desire to further
entrench itself is simply ludicrous. The fact is that they and their allies at Liberation would be
the only stockholders hurt by the Pill triggering, which is ironic, since it would be their
clandestine attempt to gain control of Ballys Board and strategic process that could be the Pill
triggering factor.
Ballys Shareholder Rights Plan, which will expire on July 15, 2006 unless it is ratified by
shareholders prior to that time, was put in place to preserve the rights of all Bally shareholders
and thwart would-be acquirers from seizing control of the Company without paying a premium.
Bally said it has filed a counterclaim in the previously disclosed proceeding initiated by
Liberation in the Delaware Court of Chancery concerning the validity of the Companys Stockholder
Rights Plan. In its counterclaim, brought against Pardus as well as Liberation and their
principals and Donald Kornstein, the Company seeks a declaration by the court as to whether Pardus
and Liberation have undisclosed agreements, arrangements or understandings with respect to their
Bally stock which might result in Ballys Stockholder Rights Plan being triggered. As previously
announced, Kornstein is Liberations long term loyalist and suggested candidate on Pardus slate.
Ballys allegations as to the two hedge funds operating as a group include:
|
|
|
Following Federal proxy litigation, Liberation belatedly admitted facts pointing to the
existence of their group action with Pardus, including the fact that Don Kornstein, one of
Pardus director nominees, was suggested as a possible candidate by Mr. Pearlman. Pardus
also belatedly admitted this fact in its SEC filings. |
|
|
|
|
During the 17 years of their acquaintance, Mr. Pearlman and Mr. Kornstein have been
involved in several business relationships, including each retaining the other as advisors
in various situations. |
|
|
|
|
Liberation abandoned its stated intention to slate its own candidates, and decided not
to run any directors after Pardus accepted Liberations suggestion that they include
Kornstein, Pearlmans old friend and colleague, on Pardus slate. Yet incredibly,
Liberation stated in its securities filings that it had not decided whether or not it will
vote for Kornstein, its former nominee, its current investor, and the longtime crony of its
principal, whom Liberation itself suggested to Pardus. |
|
|
|
|
Liberation, in soliciting support for its stockholder proposal has also sought to
solicit the authority to vote for the Pardus slate. Its proxy card includes only the
Pardus nominees. Moreover, Pearlman has openly called stockholders and even Ballys
sitting directors, urging them to vote for Pardus candidates. |
2
|
|
|
On its proxy card, Pardus has sought discretion from stockholders to allow Pardus to
vote for the Liberation proposals. |
The Company also announced that it has filed a notice of appeal with the U.S. Court of Appeals for
the Third Circuit asking it to reverse the decision of the U.S. District Court for the District of
Delaware that the merits of the parties good faith dispute concerning whether Liberation and
Pardus were acting as a group did not need to be resolved in advance of the upcoming annual
meeting of stockholders merely because Liberation has now disclosed Ballys allegations. Bally
believes that the law requires that Liberation and Pardus advise shareholders of the fact of any
arrangement, understanding or agreement they have entered into concerning the solicitation and
voting of proxies. Bally believes that stockholders are entitled to know before they vote which
insurgents are the actual sponsors of the candidates and proposals, what power these insurgents
hold collectively, as well as how these dissidents intend to wield that power. Bally will urge the
Court of Appeals to decide this issue in advance of the annual meeting.
Bally further disclosed that its action for declaratory judgment in the Delaware Court of Chancery
is ongoing against Emanuel Pearlman and his hedge fund, Liberation, in which it has asked the court
to confirm that Liberations stockholder proposal violates both Section 141(a) of the Delaware
General Corporation Law and the Companys Certificate of Incorporation. The Company said if
Liberations proposal is adopted by the required 75% vote at the annual shareholders meeting, it
intends to call upon the Chancery Court to invalidate the proposal.
About Bally Total Fitness
Bally Total Fitness is the largest and only nationwide commercial operator of fitness centers in
the U.S., with nearly 440 facilities located in 29 states, Mexico, Canada, Korea, China and the
Caribbean under the Bally Total Fitness(R), Crunch Fitness(SM), Gorilla Sports(SM), Pinnacle
Fitness(R), Bally Sports Clubs(R) and Sports Clubs of Canada (R) brands. Bally offers a unique
platform for distribution of a wide range of products and services targeted to active,
fitness-conscious adult consumers.
Forward-looking statements in this release including, without limitation, statements relating to
the Companys plans, strategies, objectives, expectations, intentions, and adequacy of resources,
are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements involve known and unknown risks, uncertainties, and other
factors that may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements.
# # #
3