Why Three Diamondbacks Minority Owners Are Suing Team's Majority Owner
Many aspire to buy a professional sports team and call the shots. Very few succeed.
A slightly more achievable goal, at least among the very affluent, is to buy a minority stake in a team. The buyer can then call himself or herself an “owner” and gain certain privileges. Access to restricted areas in the ballpark, priority seating for games and exclusive meetups with players are among common perks. If it so wishes, a team can have dozens of minority stake owners. This type of arrangement can infuse millions of investor dollars into a team’s operations. Granted, this level of ownership doesn’t provide authority over team decisions, on- or off-the-field. It also doesn’t guarantee meaningful influence over the franchise’s direction. If we’re being honest, an owner with a minority stake experiences a mostly ceremonial involvement. But the status of being an “owner” still attracts.
Like other ball clubs, the Arizona Diamondbacks have a roster of owners. The Diamondbacks operate through a limited partnership. In the context of sports, a limited partnership involves a group of investors and businesses who own respective shares. While these individuals are colloquially referred to as “owners,” they are more accurately called “limited partners.” Limited partners comprise a legal entity—the partnership—that is structured to obtain tax advantages and secure immunities from personal liability. Prospective partners must prove their mettle with different constituencies. MLB, for instance, approves the sale of any equity in a club. This means that prospective partners must clear background checks and due diligence reviews.
Among the Diamondbacks’ limited partners are Alfredo Molina and Jim Weber. Molina, a jeweler by trade, is chairman and CEO of Molina Fine Jewelers. Weber is a retired minor league pitcher who is now president and CEO of ProCuro LLC/BCRx Inc. Both are diehard Diamondbacks fans and season-ticket holders.
Molina became a limited partner in 2004, when he invested $3 million. That netted him the equivalent of a .5% interest in the partnership. Molina invested an additional $250,000 in the club between 2009 and 2014. Weber purchased the equivalent of a .25% interest in the partnership. He did so through a transaction with retired Diamondbacks third baseman Matt Williams, who at the time owned a .5% interest. In other words, both Molina and Weber are “owners” of the Diamondbacks, but their stakes in the team are under 1%. The same is true of Carlisle Investments, whose principal is Charles Carlisle.
Molina, Weber and Carlisle Investments have something else in common: they are plaintiffs in a new lawsuit brought against the Diamondbacks partnership and its general partner, Ken Kendrick. The trio is represented by attorney Roger Cohen and his co-counsel, Kathi Sandweiss. They practice in Phoenix at the law firm Jaburg Wilk. Cohen and Sandweiss authored the plaintiffs’ complaint and filed it in Maricopa County superior court on March 31.
The plaintiffs insist that Kendrick is using illegal tactics to purge them from the partnership. According to the complaint, Kendrick effectively controls about 90% of the Diamondbacks' partnership through his own stake and through his influence over other limited partners.
Kendrick’s role as general partner is central to the case. A general partner, sometimes referred to as the club’s “principal owner,” runs day-to-day operations, sets policies and oversees the hiring and firing of baseball operations and business services. The general partner is the person whom MLB generally considers the official voice of a franchise. Fans and media tend to think of this person as “the owner.”
While limited partners lack the powers of the general partner, there are nonetheless financial implications to their equity. For instance, profits and losses are allocated among all the partners. In addition, partners can be called upon to contribute toward fees in a transaction. To illustrate, five years ago the Diamondbacks entered into a contract with Fox Sports Net Arizona for the sale of broadcasting rights. Diamondbacks partners were called upon to make pro rata contributions towards legal, accounting and consulting fees. The Fox Sports Net Arizona deal later led to the partners splitting millions of dollars in distributions as well as obtaining additional interests in an accompanying broadcasting entity. While the limited partners might not have a vote per se on club affairs, their investment can provide important capital to the club.
“Buy-Up/Buy-Out”
The genesis of the lawsuit stems from a letter sent by Kendrick on Jan. 13. Kendrick wrote to the team’s limited partners in a letter entitled “Buy-Up/Buy-Out.” As summarized by Cohen (and Sandweiss), the letter informed the partners that, as part of a restructured limited partnership, each would be required to own at least 1% of the club’s partnership or their interest would be bought out. This directive goes to the meaning of the term “buy-up/buy-out”: a limited partner with less than 1% would need to “buy up” to at least 1%, or he or she would experience a “buy out” of their interest.
To that end, limited partners with less than 1% have been warned that the Diamondbacks could terminate their partnership interests. Termination can occur through what is known as a “freeze out” merger. This refers to the majority of a partnership pressuring those with minority interests to sell upon threat of termination. Freeze outs have been the source of lawsuits involving alleged breach of fiduciary duties, conflicts of interests and self-dealing.
As retold by Cohen, Kendrick’s letter claimed that the 1% floor reflected an MLB preference for clubs to “streamline their ownership group and minimize the disproportionate number of owners with very small equity stakes.” The letter portrayed MLB as concluding “efficient club governance” and “financial stability” would be enhanced if each partner possesses a “meaningful equity position.”
Cohen rejects any notion that the 1% floor constitutes MLB edict. He charges that it seemed to be Kendrick’s idea: Kendrick sought and obtained permission from MLB to institute the floor. Cohen also disputes the assertion that partners holding interests of less than 1% somehow undermines the financial stability of the club or disrupts management. This assertion, Cohen explains, isn’t supported by any evidence and seems to belie how the Diamondbacks operate: Kendrick allegedly runs the team without consequential input from partners.
Cohen also stresses that Molina, Webster and Carlisle Investments have met every requirement for ownership. They were approved by the commissioner’s office, meaning MLB reviewed their financial and legal backgrounds and deemed them sufficient. The partners also satisfied requirements found in their Diamondbacks agreements.
Too much to pay, not enough to sell
The complaint also asserts that Kendrick has manipulated the club’s equity structure to put the plaintiffs in a bind. Through Kendrick, the club retained the consulting firm Bases Loaded. Bases Loaded appraised the value of a 1% interest and the value of the limited partners’ stakes. This appraisal indicated that Molina would need to invest another $3.8 million in order to meet the 1% threshold. Alternatively, his entire interest could be bought out for $3.9 million. Weber, meanwhile, was told he would need to invest another $6.1 million to meet 1%, or he could sell his share for $1.6 million.
These dollar figures, Cohen maintains, are “artificially low.” Cohen asserts the calculations incorporate unreasonable discounts and fail to consider, among other things, how the legalization of sports betting in many states and the potential legalization of sports betting in Arizona is poised to substantially enhance the value of a Diamondbacks ownership stake.
In the complaint, Cohen claims that Kendrick initially offered to let the limited partners hire their own valuation firm. Kendrick also allegedly pledged that the club would resolve differences between the numbers supplied by the two firms (Based Loaded and the firm hired by the limited partners). However, according to the complaint, a club attorney later clarified that Kendrick had “misspoken” and that a second valuation would not be possible.
The Diamondbacks apparently no longer classify the plaintiffs as limited partners. In response, the plaintiffs have demanded, in writing, that Kendrick and the Diamondbacks provide evidence that corroborates the buy-up/buy-out ultimatum. To that end, the plaintiffs insist on all relevant emails, correspondences, work papers and empirical analyses with MLB and Bases Loaded.
The legal claims
The complaint contains several claims. One is declaratory judgment. Such a judgment is issued by a judge and reflects a clarification of the rights and obligations of the parties. Molina, Webster and Carlisle Investments seek a declaration that Kendrick’s letter “is of no force or effect” and that Kendrick can’t legally force them to increase their investment or sell their existing share. This type of petition captures the essence of the lawsuit.
The complaint also alleges breach of contract. This is a straightforward claim. The limited partners insist that Kendrick has breached their partnership agreements by, among other steps, imposing the buy-up/buy-out ultimatum. The limited partners contend that Kendrick lacks the requisite authority to condition their continued association to the partnership on a demand that isn’t expressed in the agreements. If Molina, Webster and Carlisle Investments prevail on a breach claim, they would be awarded monetary damages.
Other claims include those for breach of fiduciary duty and breach of implied covenants of good faith and fair dealing. Taken together, these claims assert that Kendrick, as the general partner of the partnership, has operated in bad faith by imposing new requirements on limited partners’ ownership. Kendrick has the legal responsibility to engage in fair dealing and act ethically. To that end, he is barred from acting in ways that deny the limited partners of their benefits of the partnership. The three plaintiffs believe that Kendrick is effectively forcing them to sell their stakes and at below-market value.
Likely defenses
Attorneys for Kendrick and the club will answer the complaint. The answer will deny the claims and likely offer additional information that attempts to rebut or qualify assertions contained in the complaint.
As a starting point, expect Kendrick to deny the complaint’s depiction of his ownership. Kendrick might argue that he does, in fact, rely on the advice and counsel of limited partners, or that he would like to, but that a large roster of limited partners makes the organization less organized.
It’s possible that MLB could help Kendrick. MLB may want to offer policy statements that support the benefits of contracting the sizes of limited partners. To the extent MLB has already done so in communications with clubs, the league could credibly maintain that Kendrick’s moves are consistent with established league policies. MLB will see a stake in the litigation. The league doesn’t want the litigation to progress to pretrial discovery, where attorneys for the plaintiffs could demand that commissioner’s office staff—who appear to be key witnesses given their interactions with Kendrick—turn over sensitive emails, other correspondences and financial records.
Attorneys for Kendrick are also poised to assert that the team’s buy-up/buy-out requirement is fully compliant with partnership agreements. Process almost always matters in contractual disputes. The more persuasively Kendrick’s attorneys can show that the team has adhered to established procedures and did so with sufficient transparency and accountability, the better the odds for Kendrick.
Settlement is where the case will likely end
It’s clear that Kendrick wants the three plaintiffs, and other partners with very small stakes, out of the Diamondbacks partnership. He’ll probably get his wish, but it will likely cost the club more than it wants to pay.
For now, the plaintiffs signal a desire to remain in the partnership. However, they might begin to feel less fondly about the club as they battle Kendrick in court. We know they believe the appraisal process commissioned by Kendrick lowballed the value of their interests. If the offered price to buy them out increases, they might ultimately say yes. Given MLB’s interest in seeing this litigation resolve without being implicated, the league might urge Kendrick to find a solution.
Michael McCann is SI’s Legal Analyst. He is also an attorney and the Director of the Sports and Entertainment Law Institute at the University of New Hampshire Franklin Pierce School of Law.
