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.

Minnesota signs undrafted rookie Naz Reid to multiyear deal

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MINNEAPOLIS (AP) — The Minnesota Timberwolves have signed rookie center Naz Reid to a multiyear contract, upgrading the two-way deal they initially gave him before a strong performance for the team’s entry in the NBA Summer League in Las Vegas.

The new contract, completed Thursday, all but ensures that Reid will be on the regular-season roster, after going undrafted out of LSU.

Jon Krawczynski of The Athletic broke the story.

The 6-foot-10, 250-pound Reid averaged 11.9 points and 5.4 rebounds in 18.6 minutes over seven summer league games against other clubs largely composed of rookies and second-year players. The Timberwolves’ team reached the championship game.

Reid averaged 13.6 points and a team-high 7.2 rebounds in his lone season at LSU, which reached the Sweet 16 of the NCAA Tournament.

Bulls bring back Shaquille Harrison on one-year contract

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Shaquille Harrison started last season as an afterthought at the end of the Chicago Bulls’ bench. Then, because Cameron Payne was not good and Kris Dunn got injured (and was really not that good, either), Harrison got his chance — and took it. He was a defender Fred Hoiberg and then Jim Boylen could trust, and he played in the final 72 Bulls games last season at almost 20 minutes a night.

He will be back with the Bulls next season, the team announced.

While not announced, this is a one-year minimum contract. The Bulls waived Harrison back on July 6 as they remade the roster, but Harrison played one game at Summer League for the Bulls and they decided to bring him back.

Harrison is a Boylen favorite — he plays hard and defends well — and while minutes will be harder to come by behind Tomas Satoransky and Coby White, Harrison is a guy Boylen wants on the bench.

Dunn is on the roster at point guard, too, but the Bulls are rumored to be looking to trade him and his $5.4 million salary. Chicago will likely have to throw in a sweetener, like a decent second-round pick, to make that happen.

Nike countersues Kawhi Leonard over ‘Klaw’ logo

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“My mind on my money and my money on my mind.”
—Snoop Dogg

Nike and Kawhi Leonard are going to court over control of his “Klaw” logo, and it’s all about money and brand.

Leonard left Nike last season, eventually signing with New Balance, and he wants to be able to market his Klaw logo as part of his line with his new company. Leonard and his representatives sued Nike for control of the logo, saying Leonard came up with it in his own drawings.

Nike has countersued and said Leonard did not design the logo. Tim Bontemps of ESPN had these quotes from the countersuit itself.

“In this action, Kawhi Leonard seeks to re-write history by asserting that he created the ‘Claw Design’ logo, but it was not Leonard who created that logo. The ‘Claw Design’ was created by a talented team of NIKE designers, as Leonard, himself, has previously admitted…

“In his Complaint, Leonard alleges he provided a design to NIKE. That is true. What is false is that the design he provided was the Claw Design. Not once in his Complaint does Leonard display or attach either the design that he provided or the Claw Design. Instead, he conflates the two, making it appear as though those discrete works are one and the same. They are not.”

TMZ posted the designs.

I’m not about to guess what a judge would decide in this case. Most likely, this gets settled one way or another.

Meanwhile, New Balance is trying to come up with a new slogan for Leonard and his gear. King of the North is now out after his move to the Los Angeles Clippers this summer.

J.R. Smith reportedly meets with Bucks to talk contract

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After five seasons in Cleveland, the Cavaliers waived J.R. Smith. The 34-year-old veteran wing is not part of the Cavaliers future, and by waiving him before the guarantee date they only had to pay him $4.4 million of this $15.7 million salary.

That makes Smith a free agent.

He sat down with the Bucks on Thursday, according to Shams Charania of The Athletic.

The Bucks can only offer minimum contracts at this point.

Smith will turn 34 before next season starts and his skills are in decline, he shot just 30.8 percent from three last season. The Bucks will likely start Khris Middleton and Wesley Matthews on the wing with Sterling Brown, Pat Connaughton, and Donte DiVincenzo behind them. They have the roster spot to make the addition. The questions are does Smith fit, does he want the small role that’s really available, and how often will he wear a shirt around the facility?