The Sirius Drama Continues

Mel Karmazin, the CEO of Sirius XM Satellite Radio Inc., is in the midst of thwarting a takeover. He warned on Friday that Sirius XM may have to file for bankruptcy as early as tomorrow because the company is unable to pay off the $175 million of debt due to Charles Ergen, the satellite billionaire. However, the WSJ reports that Karmazin and Ergen are longtime adversaries and it's unclear whether the Sirius chief executive would be willing to work for Mr. Ergen. Furthermore, a group of Sirius XM creditors say it is prepared to seek the ouster of Karmazin and other senior executives if the company files for bankruptcy instead of cutting a deal with Mr. Ergen that would allow it to remain solvent.

"Creditors will act quickly and definitively if they perceive that management is acting in their own interest and not in the best interest of the estate," said Edward Weisfelner, a partner with Brown Rudnick LLP, the law firm representing the creditor group. "The board of directors should carefully consider the ramifications."

The company has been in talks with both Mr. Ergen, CEO of EchoStar, and John Malone, the cable television pioneer who controls DirectTV Group Inc., about a deal to resolve its crisis. According to the WSJ, both parties have made offers that would allow Sirius XM to meet its immediate credit obligations in return for a significant stake or control.

Sirius's management has told investors in recent days that bankruptcy, which would enable the company to restructure under current management, may be its preferred course. It has yet to explain why filing for bankruptcy may be the more attractive option. Sirius is carrying a total debt load of about $3.25 billion.

With such substantial debt, the offers on the table may only provide Sirius XM with a short-term remedy whereas a bankruptcy filing would provide the company with longer-term protection. Once in bankruptcy, Sirius could cancel costly contracts and would also be protected from its creditors. Nevertheless, a filing would wipe out all shareholders.

The Delaware Suprme Court in Cheff v. Mathes states that the business judgment rule protects a board’s decision to thwart a takeover if the decision has a legitimate business purpose. More specifically, the directors must show that they had a reasonable belief, based on good faith and a reasonable investigation, that the takeover poses a danger to corporate policy and that they are acting in the stockholder’s best interests, not solely to keep their office.

If Karmazin and his board do, in fact, file for bankruptcy protection, investors will likely be outraged and Karmazin will probably be flooded with potential suits.