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Relativity Media – Netflix Challenges Fairness of Sale Motion

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July 27, 2018 – Netflix filed an objection [Docket No. 393] to Relativity Media’s Sale Motion [Docket No.77] citing concerns over the fairness of the Debtor’s restructuring support agreement (the “Restructuring Support Agreement” or “RSA”) and further argues that the sale is an insider sale transaction engineered by Relativity Media founder Ryan Kavanaugh and UltraV. Netflix asserts, “The Debtors themselves acknowledge that the Sale Motion is nothing more than the final step in implementing the self-dealing Restructuring Support Agreement that provided Ryan Kavanaugh with a release from the Debtors (in the face of the complete failure of the prior plan of reorganization, Kavanaugh having collected millions in salary, and no investigation whatsoever of the claims that might exist) and lucrative consulting agreement and equity participation in UltraV in exchange for validating UltraV’s debt through a release, and delivering substantially all of the estates’ assets to UltraV on account of a credit bid and minimal cash consideration….The Debtors cannot credibly dispute that Kavanaugh is on both sides of the Proposed Sale. Kavanaugh negotiated the RSA with UltraV, and the Debtors had essentially no input regarding its terms. Kavanaugh signed the RSA on behalf of the Debtors. Both Kavanaugh (in his personal capacity) and UltraV were represented by outside counsel in the RSA negotiations, but the Debtors were not. The reality is that no fiduciary (other than Kavanaugh, who was plainly conflicted) negotiated the RSA for the Debtors….UltraV’s proposed purchase price consideration is comprised overwhelmingly of a $40 million credit bid, and the market is well aware that UltraV has tens of millions of dollars in additional potential credit bid consideration – effectively chilling the possibility of higher or better offers for these assets. Moreover, UltraV has exerted undue influence over the Debtors since signing the RSA in February, locking the Debtors into a DIP financing package that gives UltraV an inappropriate degree of visibility and control over the Debtors, particularly given the combination of UltraV’s role as proposed purchaser in a private sale and the Debtors’ failure to challenge UltraV’s credit bid rights despite the presence of ample ‘cause.’ UltraV, wearing its two hats as DIP lender and purchaser, has imposed a sale timeframe on the Debtors that has effectively foreclosed any potential for competing bids…. The truth that the Proposed Sale was never meant to be open to competing bidders is underscored by the fact that the Debtors and UltraV consistently argued to the Court that the Netflix contract issues had to be adjudicated quickly in order to give certainty to the pool of potential acquirers. As it became increasingly clear that the Debtors and their advisors would be unable to obtain a determination of the Netflix issues within UltraV’s preferred timetable, they abandoned any pretense that it would be important to secure a ruling on the Netflix contract well before the auction. As presently scheduled, the auction will take place on July 31, the day before the Netflix adversary trial is scheduled to commence.”

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