Risk Factors: LightSquared Bankruptcy and Globalstar Arbitration
In April, we reported on the Federal Communications Commission’s (FCC) suspension of the conditional waiver of license conditions it had granted in 2011 to ancillary terrestrial component (ATC) operator LightSquared to allow the satellite operator to deploy a 4G-LTE (Long Term Evolution — a preliminary 4G standard) ATC wholesale telecommunications network, following claims and studies indicating that the network would interfere with global positioning system (GPS) signals. On May 15, 2012, LightSquared filed for bankruptcy protection. LightSquared asserted that the bankruptcy filing would give it breathing room to change the FCC’s mind and allow it to build out its network, but the filing is at least a major setback, and may turn out to be a fatal one.
The same week in May, MSS operator Globalstar suffered a major setback of its own, losing an arbitration against the manufacturer of its second-generation satellite constellation, Thales Alenia Space of France. In the arbitration, Globalstar had sought to force Thales to manufacture and deliver up to 23 additional satellites under a “Phase 3” contractual option in addition to the 25 purchased under the contract’s Phases 1 and 2. The arbitrators ruled that Thales was not obligated to deliver the Phase 3 satellites, leaving it up to the parties to negotiate new terms for any such deliveries. The arbitrators also awarded Thales a 53 million euro ($67.72 million) contractual termination charge, funds that the Coface-financed Globalstar will find it difficult to pay, and which will give Thales even greater leverage in any negotiations for additional satellites with the operator.
While it would be easy to cast stones at LightSquared’s regulatory and lobbying advisors, and Globalstar’s contractual advisors, the two apparently disparate debacles highlight the dangers that executory regulatory or contractual provisions of uncertain outcome pose to business plans. These are what are known as “risk factors” in pubic offering registration statements filed with securities regulators and private placement offering documents. Securities attorneys are well known for trying to state every conceivable risk factor in these documents to avoid liability, just as attorneys for pharmaceutical companies demand that labeling and marketing of drug products recite every conceivable side effect. The result is similar: the warnings are so pervasive and dire that they often wind up being discounted; just as no one seriously considering every potential listed side effect would ever take a prescription medication, no one seriously considering every potential risk factor would ever invest.
Globalstar is a Loral Space and Communications spin-off developed as a satellite telecommunications MSS operator, and the possibility that it would one day be dependent on the French export credit agency to fund the purchase of French-manufactured satellites was no doubt far from its original investors’ minds. The tie between that financing and the manufacturing contract, however, can be presumed to have affected Globalstar’s contract negotiation leverage. That does not excuse having not more unambiguously locked down its Phase 3 rights, but it gives some indication that in a difficult financing environment, Globalstar may not have had much choice or leverage in assuring the production of its second-generation constellation.
LightSquared started life as a joint venture between U.S. and Canadian L-band operators circa 2000-2001 (disclosure: I was one of the attorneys for the Canadian side of the deal), and only later developed the ATC business plan that was critical to the Harbinger Capital Partners investment. Issues like the asserted GPS interference problem were no doubt far from its investors’ minds, and even if recognized, were probably not considered to have potential to end a project into which billions of dollars had been invested.
The point is not only that risk factors are real and should be read and considered in making investment decisions, but that it is critical in making investment decisions to be able to separate the wheat from the large amount of chaff in reviewing them, and to be future looking in assessing which few ones among the many listed may really count. When a risk factor is real, a condition of investment may be to aggressively address it: to seek to renegotiate potentially dangerous executory contract provisions while performance is on-going and before all payments have been made; or to seek regulatory and potentially adverse party support for a project’s regulatory approval before capital is sunk.
Owen D. Kurtin is a practicing attorney in New York City and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at email@example.com.