Kings ownership documents reveal major potential stumbling blocks for Seattle

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CORRECTION:  February 8, 2013

An earlier version of this post incorrectly referred to a May 2003 document as an addendum to the Kings’ 1992 ownership agreement.  The May 2003 document is self-described as a proposal, which, if approved, would constitute a basis for an amendment of the Kings’ partnership agreement.  The version of the May 2003 document viewed by PBT was unsigned.

This item was co-written by Aaron Bruski and James Ham

The fight over the Sacramento Kings is building to a fever pitch.

In one corner, Seattle-based investors led by hedge fund manager Chris Hansen and Microsoft CEO Steve Ballmer have entered into an agreement to purchase the Kings from the Maloof family with the intention of moving to Seattle.

In the other corner, former NBA All-Star and Sacramento Mayor Kevin Johnson is moving comfortably toward an announcement of his equity partners, which will come at some time this week. Sources close to the situation have said that these owners will more than meet NBA criteria and be able to compete with or beat Seattle’s offer. Additionally, these owners will come to the table willing to pay their portion in an arena deal that was previously approved by the NBA, and sources say will be approved by the Sacramento City Council, as well.

USA Today and the Sacramento Bee reported that big money guys Ron Burkle and Mark Mastrov were in serious talks with the city, and USA Today reported that Burkle met with David Stern in New York on Thursday, January 24th. PBT can confirm each of those reports.

Since the Sacramento Bee’s report on the issue January 24, there has been speculation whether Kings minority owners have the “Right of First Opportunity” to purchase the team from the Maloofs.

They well may.

NBC ProBasketballTalk has acquired a copy of the Kings’ 1992 ownership agreement and an unsigned May 2003 proposal to amend the ownership agreement.

Article VII of the 1992 ownership agreement, “Transfer of Partnership Interests” starts off in Section 7.1 “Restrictions on Transfer” with the basic tenet that, “…no sale, assignment, transfer, encumbrance or hypothecation (herein referred to as a “Transfer”) shall be made by a Partner of the whole or any part of its or his Partnership interest (including, but not limited to, its or his interest in the capital or profits of the Partnership).” Section 7.2 permits certain specified sales to “Affiliates,” which in theory covers sales to essentially the same ownership (more on “Affiliates” below).

A little further down in Article VII, Section 7.3 spells out the right of first refusal in plain legalese.

“Section 7.3. Right of First Opportunity.

Notwithstanding the provisions of Section 7.1 hereof, if a Partner desires to assign all or part of his or its interest in the Partnership and such assignment is not specifically permitted under Sections 7.2A or 7.2B above, then the assignment shall be subject to the right of first opportunity hereinafter described in this Section 7.3. Before a Partner (the “Selling Partner”) actually concludes a sale of its interest in the Partnership subject to this Section 7.3, the Selling Partner shall give notice to (a) the General Partner and each other Limited Partner if he Selling Partner is a Limited Partner, and (b) to each Limited Partner if the Selling Partner is the General Partner (such Partner or Partners other than the Selling Partner being individually and collectively herein called “Non-Selling Partner”) setting forth the purchase price for which it will offer such Partnership interest for sale (which purchase price must be payable entirely in cash or part in cash and the balance pursuant to one or more promissory notes).

Section 7.3 further adds that a “non-selling partner” must step forward with its right to match within 30-days notice of the team’s sale. When that authority is exercised, the minority owner would have a 45-day window to complete a purchase.

The language is clear, but perhaps the Maloof family is counting on an earlier clause:

“Section 5.3. Limitations on Authority of the General Partner.

Notwithstanding the provisions of Sections 5.1 and 5.2 hereof:

A. The following decisions shall require the approval of Partners then holding Partnership Percentages aggregating at least 65%:

(1) The moving of the Team from the Sacramento area to another City prior to February 1, 2002;

(2) The sale of all or substantially all of the Partnership Property

Section 5.1 details the “Authority of the General Partner.” It includes language giving the majority owner “exclusive authority to manage the operations and affairs and to make all decisions regarding the Partnership and its business…”

Section 5.2 addresses the “Sale or Financing of Partnership Property.” It includes clear language stating “the General Partner shall have the sole and unrestricted right to and discretion to determine all matters in connection with any sale of the partnership Property or any part thereof…”

In layman’s terms, sections 5.1 through 5.3 establish the potential for a super-majority in the franchise’s decision-making authority. By reaching a 65-percent threshold of controlling interest, the Maloof family and partner Bob Hernreich have accomplished that by purchasing minority shares during the last decade.

While this all seems alarming for the Kings’ minority owners, it is not the end of the story. Nowhere in Sections 7.1 through 7.3 is an exception carved out protecting Section 5.3 and the Maloofs super-majority clause from the right of first opportunity. This means that while the Maloofs’ have the right to sell and/or relocate without minority approval, it doesn’t appear they have the right to sell any portion of their interest in the club without first giving the limited partners a chance to match.

As attorneys do, how an attorney may interpret the document may depend on who is paying their bills. And a judge may get to make the final call.

A May 2003 proposal to amend the ownership agreement proposed to strip the “Affiliate” language that sources tell PBT may have provided a small loophole for a transfer of the team’s majority share while circumventing the rights of the minority owners. The proposal included the following language:

“2. Partners Right of First Refusal

To clarify the issue of First Right of Refusal on purchase of partnership shares, the following is a proposed amendment to the Partnership Agreements:

A. Partner’s Proposal to Transfer. If a Partner proposes to sell, assign, or otherwise dispose of all or any part of the Partner’s Interest, however it is held, i.e. whether or not the interest is owned directly by it, or through another entity, individual, etc. (Hereafter “Such Interest”), then the Partner (“Selling Partner”) shall first make a written offer to sell such Interest to the remaining Partners, pro rata (as not all of the other Partners are required to participate in the purchase) based on their then ownership positions in the Partnership. The price, terms and conditions shall be as mutually agreed by the parties.

The following section goes on to propose that in the case of a third-party offer, the minority owners retain their right of first refusal for 60 days after receiving the selling Partner’s written notice and it finishes with this definitive statement:

“No Partner shall sell, transfer or otherwise dispose of their Interest, even if owned through a different entity and it is the purported different entity selling all or a portion of itself within the holder of the Interest, except in accordance with the provisions of this Article.”

There is one more note of interest in Section 3 of the proposal titled “Sale of an Interest in the General Partner”:

“Any offer received by the General Partners to purchase a portion, or all, of their interest, which was not purchased by the Limited Partners pursuant to their Right of First Refusal, would be considered an offer to purchase that percentage of the total entity.”

Meaning, that if the Maloofs sell their interest to the Hansen-Ballmer group for the reported $525 million and the minority owners do not take up the Right of First Refusal, Hansen and Ballmer would be required to purchase a proportional stake of the minority share as well.

We aren’t looking at $341 million (the Maloof and Hernreich 65-percent share), we would be looking at the entire $525 million. Although whether that sum would make the Seattle group even blink is up for debate.

The proposal language states that if the proposal is approved by the partners, it will constitute a basis for an amendment of the ownership agreement to be drafted and executed by all partners.  The version of the May 2003 proposal viewed by PBT was unsigned but according to a source with intimate knowledge of the situation, the proposal was signed in May of 2003.  PBT is not aware of an amendment to the ownership agreement that was later drafted and executed by all partners.

So the question now becomes, is there a Right of First Opportunity/Refusal and if so, is there a minority owner who is willing to step up and invoke that right? If so, can that owner come up with the financial backing to match the deal from the Hansen-Ballmer group?  What is the backstory of the May 2003 proposal and what became of it?  And lastly, will the NBA continue to back a Seattle deal that may have ignored the rights of minority owners?

It would be surprising if the NBA didn’t have some serious questions for the Maloofs and the Seattle group.

PBT Podcast: Celtics win over Warriors, all things Boston with A. Sherrod Blakely

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The Boston Celtics are for real.

In case you had any doubts, they ran their streak to 14 wins in a row by coming from 17 down – twice — to beat the Golden State Warriors. The Celtics have the best defense in the NBA, and it threw the Warriors off their game, something few teams have been able to do over the past few years.

Kurt Helin welcomes in A. Sherrod Blakely of NBC Sports Boston to talk about what this win means to the Celtics, why their defense is so good, how Kyrie Irving is fitting in, how young stars such as Jaylen Brown and Jayson Tatum are rising up, and what is the deal with Marcus Smart. Also, there is a lot of Brad Stevens love.

As always, you can check out the podcast below, listen and subscribe via iTunes at ApplePodcasts.com/PBTonNBC, subscribe via the fantastic Stitcher app, check us out on Google play, or check out the NBC Sports Podcast homepage and archive at Art19.

Grizzlies’ Mike Conley out at least two weeks with sore heel, Achilles

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Injuries are already starting to shape the playoff chase in the West — Rudy Gobert is out for at least a month in Utah, and the Clippers have lost six in a row as they battle injuries to three starters.

Now add the Memphis Grizzlies to the mix.

Mike Conley, the point guard who, along with Marc Gasol, is crucial to Memphis’ success, will be out at least two weeks to rest a sore left heel and Achilles, the team announced Friday. He could be out longer, Conley has had issues with this Achilles before, the team will want to be cautious, and by far the best treatment is rest.

Conley averages 17.1 points per game, is a great floor general running the offense, and is a quality defender at the point.

Memphis is 7-7 on the season and tied with Oklahoma City for the final playoff slot in the West, but the Grizzlies have dropped six of their last eight. What’s more, they are entering a gauntlet part of the schedule without Conley: Their next game is against Houston, then Portland, and in the next 10 they have the Nuggets, Cavaliers, Timberwolves, and Spurs (twice). The danger is they fall far enough back from the playoff chase they struggle to catch up again.

Expect to see a lot more Tyreke Evans, who has been strong as a sixth man but now will have much more asked of him. Also, more playmaking duties will fall to Gasol, working out of the elbow, and both Chandler Parsons and Mario Chalmers will get the ball in their hands. The question is what do they do with it.

Stephen Curry, was Warriors/Celtics a Finals preview? “Very, very likely, right?”

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The Golden State Warriors remain the prohibitive favorite to win the NBA title.

Thursday night, the Boston Celtics earned some validation that they belong in the conversation. Using a stymieing defense that threw off the vaunted Warriors offense, Boston came from 17 down in the third quarter to beat the Warriors.

With the Cavaliers stumbling out of the gate, does this make the Warriors/Celtics game a Finals preview? Stephen Curry (who was 3-of-14 shooting with four turnovers on the night) said yes, as you can see in the NBC Sports Bay Area video above.

“Very, very likely, right?” Curry said. “They’re playing the best right now in the East. Obviously, they need to beat Cleveland, who’s done it three years in a row. We’ll see, but I heard the weather’s great here in June.”

The weather in Boston is great for a short window in the spring, then the humidity kicks in. But that’s not the point.

I came into this season thinking the Celtics were a year away still, and when Gordon Hayward went down it strengthened that belief. But this team is a contender now — they are far better defensively than expected, and young players Jaylen Brown (22 points against the Warriors) and Jayson Tatum have stepped up more than expected. Kyrie Irving and Al Horford have developed a fast chemistry. And Brad Stephens is proving he is in the very upper echelon of NBA coaches.

It’s not even Thanksgiving, talk of the NBA Finals is premature. Curry is right, the Celtics still have to go through LeBron James and his Cavaliers to reach the Finals, which will not be easy.

Still, June basketball in Boston seems like a real possibility again.

Report: Momentum building toward ending one-and-done rule

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“My sense is it’s not working for anyone. It’s not working certainly from the college coaches and athletic directors I hear from. They’re not happy with the current system. And I know our teams aren’t happy either in part because they don’t necessarily think that the players are coming into the league are getting the kind of training that they would expect to see among top draft picks in the league.”

NBA Commissioner Adam Silver said that during the NBA Finals last year about the one-and-done rule for players trying to enter the NBA — they can’t be drafted by NBA teams for one season after their high school class graduates, so the best players go to college for one season (and most go to classes for less than that). As Silver said, nobody really likes the system, but it was the compromise struck between the owners (who would like to raise the draft age to 20 or higher) and the players’ union (who want the draft age at 18, as soon as guys come out of high school).

However, momentum is building to change the rule, something we have written about before and now is gaining more traction, reports Adrian Wojnarowski of ESPN.

With momentum gathering to reshape the one-and-done draft entry rule, NBA commissioner Adam Silver and NBPA executive director Michele Roberts met with the new Commission on College Basketball in Washington on Thursday, league sources told ESPN….

Nevertheless, there’s a growing belief within the league that Silver’s desire to end the one-and-done — the ability of college basketball players to enter the NBA draft after playing one year in college — could be pushing the sport closer to high school players having the opportunity to directly enter the league again. For that change to happen, though, the union would probably need to cede the one-and-done rule and agree to a mandate that players entering college must stay two years before declaring for the draft.

While the NBA and players’ union will talk to the NCAA about their plans, ultimately the college body has no say in what the NBA draft and eligibility rules are.

The best players of their generations came straight to the NBA out of high school — Kobe Bryant, LeBron James, Kevin Garnett, and others —  however, what bothered owners were the misses in the draft. There were busts, and owners/GMs want to reduce as much risk as they can in the draft (even though there are busts on guys who they saw plenty of in college, hello Michael Olowokandi).

NBA teams are now better suited to develop players than they were a couple of decades ago — every team has an assistant coach focused on just that. The best teams in the NBA right now — Golden State, Boston, San Antonio — are the best at developing players. That’s not a coincidence, and it has teams copying (or attempting to) what the successful ones do. Combine that with the growth of the G-League and teams growing their understanding how to use it, and they are better positioned to draft a player out of high school and develop him over time than they ever have been.

 

There are still a lot of questions and hurdles. If a player declares for the draft and has an agent, but isn’t drafted (or even isn’t drafted in the first round, so no guaranteed contract) will he have the option to come to college for two (or three) years anyway? Will the NCAA allow that? And Silver has talked before about the changes in the draft needing to reflect changes in how we develop players down to the AAU level, which is its own complex set of problems.

It’s not moving quickly, but these are steps in the right direction. One-and-done doesn’t work well for anyone. The college baseball style rule (go straight to the pros or spend three years in college in that sport’s case) isn’t perfect, but it’s better than the system in place. There seems to be momentum toward change. Finally.