Napster Dispute Puts Bid on Hold
German media giant Bertelsmann has been negotiating to buy Napster Inc. for $15 million to $30million, but the talks are on hold because of infighting among Napster’s other investors, shareholders in the closely held firm said Wednesday.
The dispute focuses on how much the song-sharing service is worth and how that money should be divided among Napster’s several classes of shareholders, investors said. The fight surfaced this week when founder John Fanning sued to have two members of the Silicon Valley firm of Hummer Winblad Venture Partners removed from Napster’s board.
Hummer Winblad invested $13.5million in Napster two years ago, and Fanning’s lawsuit aims to prevent the venture capital firm from keeping most of the money from a purchase. Under the terms of its investment, Hummer Winblad could cash out before other shareholders.
Fanning and other investors want to convert Hummer Winblad’s preferred shares to common, meaning more shareholders would see money from a sale. But Hummer partners John Hummer and Hank Barry say the conversion is illegal.
Fanning’s suit says Hummer and Barry are disputing a move by a majority of shareholders to have them replaced as Napster directors. It asks the court to resolve the crisis quickly, citing an unspecified offer to purchase the company.
Several investors said the offer was from Bertelsmann, which wants the conflict ended before it renews its bid. Bertelsmann declined to comment, but sources close to the company said it had not committed to buying Napster.
Napster Chief Executive Konrad Hilbers called the suit “legally groundless.” Fanning, Hummer and Barry all declined to comment.
The strategy in the legal case is complex, and the underlying agreements have not been made public.
The dispute began after word spread among Napster shareholders that Napster’s board was considering the buyout from Bertelsmann, which has loaned the Redwood City, Calif., firm more than $60 million and has the right to take a large equity stake in it.
Napster’s board consists of Fanning, who incorporated the firm in 1999, Hilbers, Hummer and Barry, who served as CEO before Hilbers joined the company last year. Fanning’s nephew Shawn Fanning, who won world fame for writing the software that attracted more than 50 million users seeking free music, still works at Napster but is not a director.
To avoid the possibility of Hummer Winblad keeping most of the money from a purchase, Fanning and his allies activated clauses in shareowner agreements that they say permit them to convert all of the classes of preferred shares into common stock. Among other things, that move gave the investors greater voting rights.
The group, armed with a claimed majority of common stock, then voted to remove Hummer and Barry from the board and replace them with Martin Kay, who works at Fanning’s Internet-company incubator, and Yosi Amram, a Napster investor and former director.
According to the lawsuit, Hummer and Barry refused to recognize the stock conversion as legitimate. As a result, the suit says, Fanning expects them not to accept the election of the new directors either.
Although Napster and the Hummer Winblad team declined to outline their defenses, a person close to the company said Fanning’s side did not have the right to convert the preferred shares to common.
Some of Fanning’s allies against Hummer Winblad, speaking on condition they not be named, said they hoped for a negotiated settlement that would allow the Bertelsmann talks to resume.
The purchase price would be far less than the market value once predicted for Napster, which became the fastest-growing Internet application in history. But the service was shut down by an injunction after it was sued for alleged copyright infringement by the major record labels. Napster is developing a service that would pay copyright holders and is trying to reach a settlement with the labels. “It’s important to get more financing for Napster, Bertelsmann has been a great partner, and it would be a shame if ... greed got in the way,” a person close to Napster said.
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Times staff writer Jon Healey contributed to this report.
