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.

Grizzlies beat slumping Pacers, who fall into tie for final playoff spot

AP Photo/Brandon Dill
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MEMPHIS, Tenn. (AP) — Mike Conley matched his career high with seven 3-pointers on his way to 36 points, helping the Memphis Grizzlies rout the Indiana Pacers 110-97 on Wednesday night.

Vince Carter had 21 points and eight rebounds, and Zach Randolph finished with 17 points as Memphis snapped a four-game losing streak. Conley went 13 for 21 from the field.

Paul George led the Pacers with 22 points, Aaron Brooks, who provided an early spark from outside the arc, had 18 points, and Thaddeus Young finished with 16.

Indiana lost for the fourth time in five games.

Memphis played without All-Star center Marc Gasol, who missed his third straight game with a left foot strain. But Conley helped the Grizzlies get off the fast start, and Pacers were never able to catch up.

Memphis led by as many as 22 in the second quarter and carried a 72-53 advantage into the break. Conley scored 22 points in the first half, and the Grizzlies went 10 for 17 from beyond the arc in the first two periods.

Brooks made four 3-pointers and scored 14 in the first half for Indiana.

The Grizzlies led 96-79 after three, and the sliding Pacers never threatened in the fourth.

Indiana (37-38) dropped into a tie with Miami for the last spot in the Eastern Conference playoff race. Both are two games behind Milwaukee and Atlanta.

The Heat, Bucks and Hawks all won Wednesday night.

TIP-INS

Pacers: Brooks made a 3-pointer in the first quarter to reach 800 for his career. … Indiana dropped to 0-8 in road games on the second night of a back-to-back.

Grizzlies: JaMychal Green was out with left shoulder soreness. That caused Memphis to use its 22nd different starting lineup this season. … Memphis scored 38 points in the first quarter, matching its highest point total for any quarter this season. … Memphis has made at least 10 3-pointers in 36 games. … In the third quarter, Carter passed Ray Allen (24,505) for 22nd in NBA history for career points scored. … Reserve guard Andrew Harrison left in the third quarter with a right ankle injury.

PACERS HOMECOMINGS

Pacers forward Thaddeus Young played high school basketball in Memphis and still lives there. Pacers guard Monta Ellis has a home in the Eads community east of Memphis.

HOME STRETCH

Memphis (41-34), which sits seventh in the Western Conference playoff race, has a beneficial schedule down the stretch. Of its seven remaining games, five are at home, and five are against teams with losing records.

UP NEXT

Pacers: Visit Toronto on Friday.

Grizzlies: Host the Dallas Mavericks on Friday.

Three Mavericks teammates restrain Devin Harris, who still gets ejected (video)

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NEW ORLEANS (AP) — Dallas guard Devin Harris was ejected from Wednesday night’s 121-118 loss to New Orleans after angrily protesting calls made by official Ben Taylor.

Harris was assessed two quick technical fouls by Taylor, the first after Harris protested Taylor’s decision to whistle him for a personal foul when he collided with Pelicans’ guard Jordan Crawford.

The impact with Crawford sent Harris crashing to the court, marking the second time in the period that Harris had gone down hard. The first time, no foul was called when a collision with Pelicans’ guard E'Twaun Moore left Harris flat on his back.

When Harris was assessed the first technical, he went into a tirade and had to be restrained by teammates as he advanced toward Taylor. That triggered his ejection.

Bucks’ Malcolm Brogdon beats shot clock, Celtics with dagger (video)

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Who should win Rookie of the Year?

Joel Embiid has been, by far, the best rookie while on the court, but a season-ending injury will limit him to just 31 games. Malcolm Brogdon has been next best over the full course of the season. Dario Saric is making a heck of a finishing kick, and with a couple weeks left, he can still catch Brogdon.

But Brogdon got his own late signature moment in the Bucks’ 103-100 win over the Celtics tonight.

With the Bucks up one in the final seconds and the shot clock nearing expiration, Brogdon hit an off-balance jumper with 3.9 seconds left to produce the final margin.

Milwaukee’s win drops Boston (48-27) to second in the Eastern Conference, behind only the Cavaliers (47-26). The Bucks (39-36) keep pace with the Hawks in a tie for fifth.

Russell Westbrook scores most points ever in triple-double, 57

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Russell Westbrook led a double-digit comeback in the final minutes of the fourth quarter. Been there done, that.

Westbrook hit a defining buzzer-beating 3-pointer. Been there done, that.

Westbrook posted a historic triple-double. Been there, done that.

All three in one game?

That’s a new level for Westbrook, who lifted the Thunder to a 114-106 win over the Magic tonight while posting an incredible stat line: 57 points, 13 rebounds and 11 assists.

James Harden scored 53 in a triple-double just this season, and Westbrook has already one-upped that record.

This MVP race is one for the ages.