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Kings ownership documents reveal major potential stumbling blocks for Seattle

Feb 4, 2013, 11:43 PM EDT

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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.

  1. thebigkahuna23 - Feb 4, 2013 at 11:52 PM

    Leagality aside how much are we gonna hate all the hipsters from Seattle that would get into the team and sport?

    • golfbybryan - Feb 5, 2013 at 12:07 AM

      The hipsters from Seattle had nearly double the history in terms of years in town, with a team that we acquired through expansion. I spent my childhood pretending to be Shawn Kemp in my hipster backyard, so you’re damn right I’ll hop right back into that decrepit arena that they left in 2008.

      I hate to see a good NBA city lose a team, but it’s bullcrap like this that tests my patience and sympathy. Understand that since expansion isn’t really an option, we take what we can get. And at this point, the Maloofs have threatened to move the team to Anaheim and Virginia Beach, so we’re not going to turn this down because it happened to us.

      • brianspider - Feb 5, 2013 at 12:56 AM

        Wow, sensitive to the hipster comment apparently. That aside, Seattle fans such as this one are the living representation of cognitive dissonance. Always fascinating to imagine what their next justification will be.

      • golfbybryan - Feb 5, 2013 at 1:20 AM

        I’m sensitive to Sacramento fans trying to make this about Seattle rather than about the Maloofs. I’ve seen youtube videos and articles pitting the fan bases against each other. I don’t know why Sacto fans expect Seattle fans to be dismissive of our longest standing sports franchise returning? This should be about hating the system, not hating Sonic fans.

      • brianspider - Feb 5, 2013 at 1:27 AM

        You are totally right, Seattle is definitely the victim in this current situation.

      • cbt22 - Feb 5, 2013 at 9:38 AM

        brianspider you are probably just trolling but you do realize it isn’t Seattle’s fault if they get the kings. It also isn’t Seattle’s fault they had the Sonics stolen from them as it is not Sactowns fault if they lose the Kings. It is the system and they are getting screwed because owners feel that money is more important then the fans that made them the money in the first place. I am not sure if you are a bitter Sactown fan but there isn’t anything fan bases can really do to stop a team from moving once the owners get dollar signs in their eyes.

      • stylesac7 - Feb 5, 2013 at 2:20 PM

        Just remember that not all of us sac-townians speak out of ignorance.

        I think this goes either of these two ways:

        1) We Kings fans are not able to realize what the Sonics were to Seattle, just as you Sonics fans are not able to realize what the Kings are to Sacramento.

        2) Whether they know it or not, both groups of fans realize perfectly clearly what the Kings and Sonics are/were to their respective cities because walking in the others’ shoes would feel pretty damn familiar.

        I think the second comes closer.

        I’m getting past the stage of wanting to feel so bitter towards Seattle because I always knew that emotion wasn’t directed the right way. But if the kings stay, I’ll run back and forth across the country until I have a forrest gump beard, and then I’ll go to a kings game and be grateful, whether the team is a contender or barely watchable.

      • dbara43 - Feb 5, 2013 at 4:29 PM

        Yeah really, WHAT SACRAMENTO FANS? You’re last in the league in attendance.

      • stylesac7 - Feb 6, 2013 at 1:20 AM

        not what matters here at all, but I want to say it anyways:
        28×2= 56, not 41

      • kjfan - Feb 6, 2013 at 10:15 AM

        Kings Fan. Sacramento is going all in on this one. I hope seattle does get a team , just not this one. Hopefully the NBA can make it it right for both cities. I honestly believe Seattle deserves a Team but so does Sacramento. Sacramento has dealt with so many cities trying to take our only major sport , and now we have seattle in front of us. we love our Sacramento kings just like you loved the sonics. Sacramento is going to give it it’s all , it’s all! we are going to fight for our Kings. sorry seattle lost their team. but we can not lose ours. we just can’t. so Sacramento has no choice but to go all in on this one. Majority of Kings Fans want to see Seattle with a NBA team but we are fighting to keep our own. It’s to hard to imagine Kings playing elsewhere , Sacramento is home of the Kings.

    • lockstockand2 - Feb 5, 2013 at 12:23 AM

      “Get into the sport”? You realize Seattle was as “into the sport”, as any fanbase in the NBA for 41 years right?

      • brianspider - Feb 5, 2013 at 12:56 AM

        Some fight you put up for your team when they were on their way out of town.

      • lockstockand2 - Feb 5, 2013 at 3:13 AM

        That’s hilarious brianspider. Tell me more about how you attended the constant Save Our Sonics rallies, even after Stern approved Clay to take the team to OKC.

      • lyndseymarieee - Feb 5, 2013 at 8:31 PM

        All of this sounds a lot like the conversations happening between people of OKC and people of Seattle after the Sonics moved and became the Thunder…

      • kjfan - Feb 6, 2013 at 10:24 AM

        reminds me of Sacramento and Orange county. now we got Seattle in front of us. Kings Fans are use to it.

  2. 69jaredallen69 - Feb 5, 2013 at 12:03 AM

    Can you repeat the part of the stuff where you said all about the things?

  3. kissthequeensgoodbye - Feb 5, 2013 at 12:03 AM

    Lol, at least we can spell.

  4. lawlok - Feb 5, 2013 at 12:07 AM

    One would think “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…” is pretty all-encompassing. Unless there’s restrictions on both their unrestricted right and unrestricted discretion. Keep the hope alive, I suppose.

  5. Mr. Wright 212 - Feb 5, 2013 at 12:15 AM

    Seattle deserves their team back. Let Memphis get some sort of exception from that lease they have that would otherwise prohibit them from moving, and move them to Sacramento, if Sacramento wants a team that badly. The Grizzlies are doing bad business; only caring about the bottom line and not ultimately winning. It’s going to cost Hollins his job and the fans are going to turn on them like the Charlotte people did Shinn if they keep making obvious cap cutting moves akin to the Rudy move.

    • sw19womble - Feb 5, 2013 at 10:16 AM

      Grizzlies belong up in the Pacific Northwest anyway. :)

    • stylesac7 - Feb 5, 2013 at 2:03 PM

      If you were wondering whether or not Sacramento wants a team “that badly”, you don’t have to wonder anymore. We do want a team “that badly”. We want our team “that badly”. Happy to settle that for you. Seattle shouldn’t have gone through what it did, and believing we shouldn’t either isn’t selfish. Seattle deserves their team back, you’re right. But we tend to care about that less when it would mean losing our team. Could you blame us?

      • kjfan - Feb 6, 2013 at 10:32 AM

        well said. we love the Sacramento Kings.

  6. coachglove - Feb 5, 2013 at 12:24 AM

    Selling “partnership property” is not the same as selling shares in the partnership. Partnership property in that context refers to things the partnership owns (ie- the arena, land, planes, etc.) not shares in the partnership. A partnership cannot own shares of itself. Partners own shares, while the partnership owns property. The section 5 language is irrelevant to the ability of minority partners to have a right of 1st refusal. Looks like the Kings aren’t going anywhere anytime soon.

    • lawlok - Feb 5, 2013 at 1:11 AM

      Interesting point. Though, even then these hopes are still pinned on Hansen and Ballmer’s high priced lawyers and the NBA lawyers who have reportedly looked at the deal either completely overlooked these clauses or completely misinterpreted the language. I don’t find that particularly likely, but I suppose it is theoretically possible.

    • mustardtigers - Feb 5, 2013 at 1:19 AM

      Could “partnership property” include the team?

      • coachglove - Feb 6, 2013 at 1:28 AM

        If lawyers get involved, the team won’t move. A judge would surely grant an injunction saying the city would be irreparably harmed by a move given the team owes the city money. The length of the legal process alone would greatly inhibit a move.

        It is possible you could consider the team property, but only if you believe that the team can be separated from the partnership, whose sole purpose was to control the team. You can’t sell the team without selling the shares in the partnership that own the team (same as shares of stock – you’d have to make the argument that GE is property of the shareholders, when in reality the shares are the only property of the shareholders and those shares come with rights). So, there is no “Sacramento Kings” as far as a legal entity…the entity is the “Sacramento Kings Partnership” (whatever the official name is…) and selling that is accomplished by selling shares in the partnership to people who then control the brand name “Sacramento Kings”. The Section 5 language is to keep the 65% interest from moving the Sacramento Kings, which in and of itself, does not include a sale of any shares in the partnership.

        Rights of 1st refusal are almost always upheld in these cases.

  7. mazblast - Feb 5, 2013 at 12:47 AM

    Legalities, shmegalities. What’s going to happen is whatever David Stern wants to happen.

    • badintent - Feb 5, 2013 at 2:20 AM

      Stern is on his way out, he wants one more big payday like he got from Clay

  8. giantssb42champs - Feb 5, 2013 at 8:05 AM

    You lost me at “hipsters in Seattle”.

  9. mrlaloosh - Feb 5, 2013 at 8:53 AM

    They should name them the Seattle Pilots.

  10. sw19womble - Feb 5, 2013 at 10:18 AM

    Good news! Greg Jamison was spotted boarding a plane from Phoenix to Sacramento!

  11. benihanagt - Feb 5, 2013 at 10:43 AM

    Ahh….the unbiased, no agenda having comments from a “national writer” who just so happens to live in Sacramento. How great of you to uncover the legalize in these documents, I’m sure the Hansen/Ballmer group just skimmed this and called it good, didn’t even have their lawyers take a peek. This will hit them out of nowhere and derail all of their plans.

    • mazblast - Feb 5, 2013 at 11:25 AM

      It wouldn’t surprise me if their lawyers barely looked at it while charging hundreds of “billable hours” and gave the client the answer the client wanted. Happens all the time.

    • sponedal2013 - Feb 5, 2013 at 1:32 PM

      You must not be familiar with the Maloofs, they couldn’t interpret a contract even if it had pictures to go along with it.

      They probably just told Hansen “oh yeah we have it covered”.

  12. Corey Jeppesen - Feb 5, 2013 at 11:50 AM

    This is stupid. Owners have already said who they want to sell to. Why can’t it just be that easy!

    • alexanderckim - Feb 5, 2013 at 12:43 PM

      DID YOU NOT JUST READ THE EFFING ARTICLE? The writers go into depth (actually its the entire substance of the article), why this deal MIGHT be held up…

      Legality my friend, laws, rules. Maloofery

    • kjfan - Feb 6, 2013 at 10:37 AM

      is this your first time Maloofed.

  13. mustardtigers - Feb 5, 2013 at 12:26 PM

    It appears the Seattle group is buying the team from the partnership group. Therefore, they are not buying the Maloof’s interest in the partnership, which the right of first refusal applies to. Since the Maloof’s control greater than 65% of the partnership they have the right to sell partnership property (the team, arena, etc.).

  14. gls24 - Feb 5, 2013 at 4:03 PM

    I don’t recall ANYONE here in Sacramento feeling bad about poaching the Kings from KC. The world’s most traveled franchise continues their nomadic trek through life.

    And yes, I am a longtime Sacramento resident . . . who by the way resents the Mayor doing NOTHING but work for the Kings.

    • kjfan - Feb 6, 2013 at 4:23 PM

      alot of people claim to be from sacramento but actually from seattle. you can claim your from Sacramento but i seriously doubt that. I’ve been to blogs for an example Sacramento Bee and Komo News , this person shows up at Sacramento Blog and types all sorts of negitive stuff about the mayor , arena deal , what ever it is. Same person name Common Sense. who is from seattle. Sacramento is use to reading these types of comment. I know your not from Sacramento , your more like common sense from seattle claiming to be from Sacramento. an impostor. the Majority does NOT resent the Mayor , infact he was voted into office Twice! how can anyone do such a terrible job get voted agian as mayor. how do you do nothing and become mayor agian.

  15. dbara43 - Feb 5, 2013 at 4:33 PM

    Everyone is forgetting that the “Purchase and Sale Agreement” is with Hansen and Balmer, not anybody in Sacramento. It doesn’t matter if the Desert Princess comes up with another group that can “match” Seattle’s offer, they don’t have a contract. Stern cannot void a legal contract unless he wants to expose himself and the league to a multi-million dollar lawsuit which would certainly result. The NBA will only vote on the contract itself, not anything else.

  16. Corey Jeppesen - Feb 5, 2013 at 6:42 PM

    KJ does seem to be putting a lot of time and effort into this. What about other mayoral responsibilities? ;)

    • kjfan - Feb 6, 2013 at 10:55 AM

      I’ll answer that because Sacramento is my Hometown. never ever that i can think of , ever had a Mayor like Kevin Johnson he is an inspiration and a great leader. I honestly believe if Sacramento would of had another Mayor in Sacramento. The Kings would Have been gone by now years ago. because of Mayor Johnson Leadership Sacramento can look forward to better days. he is not the type to sit on his hands and do nothing at all. he is no quitter. he understands the importance of Jobs and business and revenues. Mayoral responsibilities ? this is his second term in office and i would vote for him agian and agian. I don’t remember any Mayor with the leadership Kevin Johnson has. that’s saying alot about our Mayor. he is a local Hero to the community. Sacramento is very lucky to have him. very lucky.

      • mitchy39 - Feb 7, 2013 at 2:38 AM

        You are lucky to have a mayor like KJ. If we had someone like him 5 or 6 years ago we would never had lost the Sonics. The mayor and city leaders gave up at the last minute when it looked like the judge was going to uphold the lease agreement. Also in Seattle we had idiot groups like “Citizens for more important things” that devalued sports teams and said they offered no civic or cultural value. These are the same people that just a few weeks ago were cheering for the Seahawks in the playoffs.
        Originally I was holding out for expansion because I didn’t want to do to Sacramento what OKC did to us, but I really want a team back and I don’t want to wait any longer. I’m sorry but the deal is done and the kings are going to be the Sonics next season. You can drive the 10 or 11 hours up to Seattle next year to watch a game…that’s what I’m doing on April 17, driving 10 to 11 hours down to Sacramento to watch the last kings game. There will be many Sonics fans down there. Surprised how many tickets are still available for that game.
        PS…you can drive a little over an hour to go see an NBA game in Oakland, we never had it that easy, it is 3 hours to Portland.
        You will get a team back! We did!

      • marc8564 - Mar 31, 2013 at 5:47 PM

        No doubt that KJ is a great leader with a lot of self agenda in his heart ?
        KJ really cares about KJ. I said that because if one really cares about
        their city, one would do anything for what is best for that beloved
        city.
        The one example of this is the negotiations for the binding agreement between
        The city of Sacramento and the arena investors. The negotiations took weeks
        to be settled which usually means that the two groups are that far apart from getting
        a deal done.
        Finally that Sunday, after weeks of negotiations the city and the investors reached
        an agreement.
        This is what both parties had agreed.
        The city of Sacramento will come up with $ 258 million in contribution , while the supposedly
        very wealth wales will contribute $ 190 million for this arena deal, what a great deal for the
        investors and a desperation move for the city of Sacramento.
        I guess when you want something bad enough, you’ll try to get it anyway possible way necessary
        even if you have to sell out your (mother) in this case your beloved city of Sacramento.

        Reading the binding agreement between the city and the investors made me scratch my head in
        disbelief in how this deal has a lot of holes for the taxpayers to be worried about ? numbers don’t lie
        Next time be very careful in who you put in a pedestal ?
        Sometimes a persons put up appearance is not who they really are.

  17. liddogg33 - Feb 6, 2013 at 3:46 PM

    truth be told the city of sacremento cant tie the city of seattles shoes!!! You should have sold more cows or chickens or bailed more hay or did whatever it is you farmers do to attend more basketball games. Hansen and Balmer have enough money to pay the best lawyers in the united states to take a week long vacation to do nothing but review the binding purchase and sale agreement.. So funny how kevin johnson thinks he has whales when balmer and hansen pay more in taxed anuualy then these “whales” make in a year.. We have a better city, a better arena, better owners, and truthfully better fans.. Games over no matter what hillbilly reporter from Sacremento writes!!! Ill be in the Key arena watching demarcus cousins and the boys play the 2013-14 Season in SEATTLE!!!!!

    • kjfan - Feb 6, 2013 at 4:37 PM

      Don’t spit up in the air, it comes back in your face!

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