Judge orders Riverstone shareholder meeting

A bankruptcy court judge on February 23 ordered that Riverstone Networks hold a long overdue shareholder meeting March 7 in New York City — a meeting that could delay or even prevent the planned sale of the company’s assets to Lucent Technologies.

The court denied the company’s motion to halt the meeting – the first since July 2002 — apparently unconvinced that such a meeting in the middle of the planned $170 million sale of the company million would not be in the shareholders’ interest.

Riverstone will not be issuing proxies for the meeting, according to Howard Kalt, who heads the company’s investor relations department, so shareholders of record – as of Feb. 21 – who show up to vote in person, will get to elect seven of the eight company’s eight board members, all of whom approved the sale. The company contends that it is unable to produce audited financial statements that must accompany a proxy.

Some stockholders have expressed their displeasure with the bankruptcy filing, which coincided with the company’s agreement to end a long-standing Securities and Exchange Commission investigation into the firm. Riverstone agreed to an SEC revocation of its stock registration for not filing accurate audited financial statements. The SEC halted trading two days after the Chapter 11 filing, stopping trading at $1.07 a share — less than a tenth of the price the stock was trading for when Cabletron Systems spun off Riverstone in 2001.

Shareholders didn’t get to vote on the sale because it is being done through bankruptcy court.

The March 7 shareholder meeting, originally ordered Dec. 22 by the Delaware Court of Chancery, came in response to a complaint filed by dissident shareholder Charles Grimes in October 2005.

Grimes owned 3.5 million shares as of November 2004, making him one of the company’s largest individual stockholders. Grimes also weighed in at bankruptcy court. In one motion, he urged that the bankruptcy judge dismissed the case.

Riverstone has enough cash and equivalents to pay off $66 million in debt, but filed for bankruptcy because Lucent Technologies wants title to the company‘s assets, free and clear of any possible liabilities. The company said it was also losing $5 million a month, was distracted by the then-pending SEC investigation.

Grimes however maintained that a solvent company could not use a bankruptcy court to sell a company.

“Riverstone has not identified any risk of default or litigation (pending or others) or any other recent event which prompted the Chapter 11 filing at this time,” his attorneys argued.

In a separate motion, Grimes moved to slow down the bankruptcy proceeding so that it would give other firms a chance to bid. The bid procedures, his attorneys argued “are not designed to maximize value for the equity holders, but rather to ensure that Lucent is the successful bidder.”

Grimes argued that the March 16 deadline for bids did not give enough time for alternative bids, and that the terms of the bidding also excluded others. Grimes wanted the bankruptcy court to set up an Official Committee of Equity Holders to counter the Official Committee of Unsecured Creditors.

The creditors – primarily the bondholders – were sure to get their money in full, he argued. It is shareholders’ money that was really at risk.

Grimes’ second motion was echoed by attorneys for Xerion Partners II Master Fund Limited, one of the largest institutional investors in the company, who also asked for a shareholders meeting.

“Riverstone’s stockholders cannot rely on the Debtor’s management to adequately protect their interest,” Xerion’s attorneys wrote. “Stockholders have reason to question management in light of historic reporting improprieties and accounting irregularities.”

Riverstone must notify shareholders by letter that a shareholder meeting will take place on the 39th floor of 101 Park Avenue at 9 am on March 7.

That is the same morning that jury selection is scheduled to begin in U.S. District Court in Concord in a criminal trial of five former executives of Cabletron’s other spinoff company, Enterasys Networks, on charges of conspiring conspiracy to commit securities fraud. – BOB SANDERS