Governance Failures

In its lawsuit, as well as its letters and presentations to TerreStar shareholders and to the Board, Highland Capital outlined many problems with the SkyTerra transaction that highlighted governance failures by the leadership of TerreStar. These failures included:

– The new transaction resembled the failed transaction from a year prior;

– Failure to seek a shareholder vote gave the appearance of the transaction being “rubber stamped” or “pre-ordained’;

– Appearance of inadequate valuation process and limited due diligence;

– The TerreStar Board’s seeming unwillingness to explore multiple sale options and strategic alternatives beyond those suggested by CTA, Jared Abbruzzese, and MSV;

– The transaction would serve to dilute existing shareholders of TerreStar because more shares would be issued than were currently outstanding, thus making the proposed “roll-up” transaction more like “a sale of the company for no cash, a minority interest in a combined enterprise, and no ongoing control or adequate representation on the surviving Board of Directors.”

– The fact that the transaction would monetize and enrich MSV management and board members, including Jerry Kittner and Jared Abbruzzese, while requiring TerreStar to shoulder the tax burden.

(Source for all bulleted points referenced above in this section: Presentation to TerreStar Board)

The bottom line regarding the SkyTerra transaction was that despite this long list of benefits that the transaction would provide to MSV and its insiders, there was allegedly no clear path to value for shareholders of TerreStar. This notion is supported by the fact that TerreStar’s stock price dropped significantly after the deal was officially announced on May 8, 2006. On that day, trading of TerreStar shares closed at $18.28 per share. One month later, on June 8, 2006, trading closed at $15.10. Six months later, on November 8, 2006, trading closed at $11.32 per share. This represented nearly a 40% drop only six months after the announcement of the deal.

The materials filed by Highland Capital in relation to the SkyTerra transaction provide even more detail about allegations regarding a lack of governance and adherence to fiduciary responsibility on the part of TerreStar’s Board. Unfortunately, the SkyTerra transaction was just one example of failed governance on the part of TerreStar’s leadership team as the Company’s stock continued to fall. (Source for preceding paragraph: Presentation to TerreStar shareholders)

Other examples include:

– The Board’s willingness to enter into an agreement that would result in the exchange of significant portions of its assets without a stockholder vote in the middle of a proxy contest;

– The Company operating without a CEO or CFO for an extended period of time and having an absentee COO;

– The granting of generous and “underserved” options payouts to directors just before five directors announced that they would not stand for reelection.

(Source for preceding bulleted points: Presentation to TerreStar shareholders)

In fact, during the proxy battle waged against the then-current Board of Directors, both Institutional Shareholder Services (ISS) and Glass Lewis agreed with many of Highland Capital’s assertions. In its analysis, ISS explained:

“…we feel that Motient has had corporate governance issues as indicated by selective stock repurchases, granting of options at below market price to board members, and related party transactions. Furthermore, we feel that management’s claim of the Exchange Transaction being ‘economically neutral’ for shareholders is based on undisclosed valuation assumptions, and hence difficult to verify. We believe that the company would benefit from greater oversight by outside and independent directors who have a vested stake in the firm.”

As another example of poor corporate governance, back in July 2005 TerreStar convened a self-proclaimed “independent” audit of its Board of Directors in response to allegations of governance failure and conflict of interest among its board. While the Audit Committee summarily dismissed the allegations as being “completely baseless”, they allegedly did not produce a final report informing interested parties of the findings or bases for the conclusions nor disclose what questions it asked the group to investigate. Furthermore, the independence of the Audit Committee’s counsel came into question.

Barack Ferrazzano Kirschbaum Perlman & Nagelberg LLP was retained to assist the Audit Committee by providing “independent counsel” regarding the allegations made against the Board of Directors of TerreStar. However, Heather Macklin, the wife of TerreStar’s general counsel Rob Macklin, is alleged to have practiced law at Barack Ferrazzano at the time of the Audit Committee’s investigation. This raises a reasonable question regarding the impartiality of the audit. Moreover, Barack Ferrazzano had represented TerreStar in six different matters prior to being retained for this matter. (Source for preceding paragraph: Letter to TerreStar Audit Committee)

Given these circumstances, how could the Audit Committee’s investigation truly be seen as “independent”? Was this simply another example of a conflict of interest that turned out to be beneficial for the TerreStar Board of Directors?

These failures and the continued allegations of self-dealings on the part of the Board of TerreStar are indicative of the various factors that seem to have contributed to the Company’s abysmal lack of success. As the lawsuit filed by Highland Capital demonstrates, as well as numerous other sources cited herein, the governance inadequacies and rampant allegations of conflicts of interest at TerreStar reflect the growing appearance of impropriety within the Company’s Board of Directors and ultimately led to the destruction of shareholder value.

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