TVG Sues Youbet Over Control Issues

Earlier this month, ODS Technologies, a subsidiary of Gemstar that does business as TVG Network, filed a complaint against Youbet, alleging that Youbet is doing irreparable harm to its shareholders by providing false and misleading proxy information in order to swing a vote that would amend Youbet's Charter. TVG also alleges that Youbet's attempt to change its Charter breaches an agreement that would give TVG the right to control a majority of Youbet's board.

On May 18, 2001 TVG and Youbet entered into an agreement whereby TVG granted Youbet licenses and rights to simulcast audio and video while accepting pari-mutuel wagers on horse races at tracks with which TVG has exclusive partnerships. In exchange, TVG received two warrants that could be exercised before May 18, 2004.

TVG has already exercised the first warrant, which entitled it to purchase 19.9 percent of Youbet's common stock for $3,884.65.

The second warrant, which has not yet been exercised, entitles TVG to purchase a sum of shares that will constitute 51 percent of Youbet's common stock when added to the 19.9 percent it already owns.

If TVG were to acquire 51 percent of Youbet's stock, the Warrant Issuance Agreement would also grant TVG the right to a 51 percent board representation and voting control. TVG would essentially take control of the board.

TVG claims that Youbet is trying to render the terms of the Warrant Issuance Agreement invalid by pushing a vote at the September 26 annual stockholder meeting that would amend the company charter.

The board of directors recommends in Youbet's proxy statement that stockholders vote to adopt two amendments.

The first would classify the board, meaning members could only be removed by cause.

The second amendment would require a supermajority (66-2/3 percent) vote to make any further amendments to the company charter or bylaws.

TVG argues that if the supermajority act were to pass, TVG would no longer be able acquire board control or amend Youbet's charter or bylaws by redeeming the second warrant. Furthermore, the act that would classify the board would make it nearly impossible for TVG to gain any new board representation, even if it had acquired 51 percent of shares.

TVG also alleges that Youbet is not providing adequate information about the charter amendments to its stockholders.

TVG issued a statement about the situation and said Youbet is leaving out key information to shareholders.

"The sections of the Proxy Statement discussing the Charter Amendments do not contain any discussion of TVG, its contractual rights, the Warrants or the potential effect that approval of the Charter Amendments might have on TVG's decision to exercise the second warrant and thereby invest additional millions of dollars in Youbet."

TVG also claims that Youbet gave it no advance notice that it planned to propose the Charter Amendments, and that TVG only discovered the fact by retrieving Youbet's proxy materials from an on-line service.

TVG therefore "seeks injunctive relief to prevent the Annual Meeting from proceeding until after Youbet has provided full and fair disclosures to its stockholders and the market has had time to digest the additional information. TVG also seeks equitable relief invalidating the Charter Amendments as a breach of fiduciary duty."

Youbet's response is that it "intends to vigorously contest an attempt by one of its shareholders to garner a special interest by falsely accusing the Company of failing to provide sufficient information in its current proxy material."

It maintains that its Board and management are acting in the best interest of shareholders and that TVG's rights are still fully achievable, even if the charter amendments pass.

Youbet General Counsel Victor Gallo said the company is in line with proper procedures.

"An unbiased reading of (the) language (in a Warrant Issue Agreement between Youbet and TVG) is in no way inconsistent with Youbet's proxy proposals," he said.

He also said, "TVG's rights remain intact with regard to designating directors at annual or special meetings of the stockholders of Youbet held for the purpose of electing directors. TVG clearly retains the right to exercise its warrant. TVG clearly retains the right to designate directors in accordance with the Warrant Issuance Agreement. Just as clearly, (Youbet) has committed no breach of these provisions, material or otherwise." He added, "Youbet will continue to do that which it believes best promotes shareholder value ... and (the Company) will not act in the special interest of one shareholder."

To view a copy of the complaint click below.