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LIQUID AUDIO, INC.
(Name of Registrant as Specified in Its Charter)
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MUSICMAKER.COM, INC.,
JEWELCOR MANAGEMENT, INC., BARINGTON COMPANIES EQUITY PARTNERS, L.P., RAMIUS
SECURITIES, LLC, DOMROSE SONS PARTNERSHIP,
JAMES A. MITAROTONDA and SEYMOUR HOLTZMAN
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
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On June 19, 2002, musicmaker.com, Inc. sent the following letter to the
board of directors of Liquid Audio, Inc.
musicmaker.com, Inc.
888 Seventh Avenue
17th Floor
New York, New York 10019
June 19, 2002
Board of Directors
Liquid Audio, Inc.
800 Chesapeake Drive
Redwood City, CA 94063
Dear Board Members:
I am enclosing a letter that was sent to your counsel today regarding our
concern about the proposed merger with Alliance Entertainment Corp., which was
approved by the Board of Directors of Liquid Audio, Inc. We are vehemently
opposed to the company taking this action, and you should be ashamed of the
breakup fee provisions in the merger agreement.
I believe that the Board's conduct is egregious and actionable. In my
business career, I have never had as many telephone calls from angry
shareholders as I have recently received from your shareholders.
I would expect the Board to have the common sense to communicate with its
shareholders to find out if they would support a merger before the Board enters
into such a transaction and commits company assets. Perhaps you would be good
enough to tell me of any substantial shareholders, other than members of
management, who applaud the current management or support the transaction with
Alliance. I would appreciate a response from the Company. To date, the Company
has failed to respond to any of our prior letters.
Sincerely,
/s/ Seymour Holtzman
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Seymour Holtzman
Chairman
Enclosure
GORDON, FOURNARIS & MAMMARELLA, P.A.
ATTORNEYS AT LAW
SUITE 700, 1220 NORTH MARKET STREET
P.O. BOX 1355
WILMINGTON, DELAWARE 19899-1355
June 19, 2002
BY FACSIMILE TRANSMISSION
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Stephen C. Norman, Esquire
Potter Anderson & Corroon LLP
1313 North Market Street
P.O. Box 951
Wilmington, Delaware 19899-0951
Re: musicmaker.com, Inc. v. Liquid Audio, Inc.
Del. Ch., C.A. No 19601-NC
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Dear Steve,
I am writing to express the position of my client, musicmaker.com,
Inc. ("musicmaker"), in connection with the recent announcement of the proposed
merger (the "Merger") between Liquid Audio, Inc. ("Liquid Audio") and Alliance
Entertainment Corp. ("Alliance"). Although many reasons exist for the
stockholders of Liquid Audio to oppose the Merger, this letter will be limited
to a discussion of certain of the "termination provisions" of the merger
agreement between Liquid Audio and Alliance (the "Merger Agreement") that Liquid
Audio filed with the Securities and Exchange Commission. Specifically, Section
7.3(b)(i) of the Merger Agreement provides that Liquid Audio must pay to
Alliance a $3,000,000 termination fee under the following circumstances:
If the Merger Agreement is terminated by Liquid Audio or Alliance
because the Merger is not consummated on or before December 31,
2002, and within twelve months following such termination, Liquid
Audio enters into a definitive agreement with respect to or
consummates any "Acquisition Proposal" (as defined in Section 5.3(e)
as modified by Section 7.3(b)(i) of the Merger Agreement).
If the Merger Agreement is terminated by Alliance at any time prior
to approval of the Merger Agreement and the Merger by the
stockholders of Liquid Audio because of a "Triggering Event" (as
defined in Section 7.1 of the Merger Agreement); If the Merger
Agreement is terminated by Liquid Audio because of a "Superior
Offer" (as defined in Section 5.3(c) of the Merger Agreement).
Moreover, Section 7.3(b)(ii) of the Merger Agreement provides that Liquid Audio
must pay to Alliance a $1,000,000 termination fee if the Merger Agreement is
terminated by Liquid Audio or Alliance because the stockholders of Liquid Audio
fail to approve the Merger Agreement and the Merger. In addition to this
$1,000,000 termination fee payable under Section 7.3(b)(ii), if Liquid Audio (a)
within twelve months following the termination of the Merger Agreement, enters
into a definitive agreement with respect to or consummates any "Acquisition
Proposal" (as defined in Section 5.3(e) as modified by Section 7.3(b)(ii) of the
Merger Agreement), or (b) within six months following termination of the Merger
Agreement, completes a liquidation or dissolution, Liquid Audio must pay to
Alliance an additional $750,000 termination fee.
It is apparent that the Merger Agreement was approved by the Board
of Directors of Liquid Audio (the "Board"), and the 2002 annual meeting of the
stockholders of Liquid Audio (the "Annual Meeting") was cancelled by the Board,
in an attempt to frustrate musicmaker's proxy solicitation. The Board and
current management of Liquid Audio approved the Merger Agreement to delay the
Annual Meeting and ultimately to coerce the stockholders of Liquid Audio to not
vote in favor of musicmaker's nominees. In fact, the $750,000 termination fee to
be paid to Alliance if Liquid Audio is liquidated or dissolved is a highly
unusual provision and was approved by the Board to entrench the Board and the
current management of Liquid Audio in their respective positions and to limit
the ability of musicmaker's nominees (if they are elected) to enhance the value
of the stockholders' investment through a possible liquidation or dissolution of
Liquid Audio. Simply stated, the Merger Agreement was approved by the Board for
the "primary purpose of thwarting the exercise of a stockholder vote." Blasius
Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988). Accordingly, the
approval of the Merger Agreement and the Merger, and the cancellation of the
Annual Meeting reflect breaches of fiduciary duty by the Board and violations of
Delaware law by Liquid Audio. See id.
Moreover, the $3,000,000 termination fee provided under Section
7.3(b)(ii) of the Merger Agreement, representing approximately 5.7 percent of
the market value of Liquid Audio, is excessive, coercive and stretches the
definition of range of reasonableness beyond its breaking point. See Phelps
Dodge Corp. v. Cyprus Amax Minerals Co., 1999 WL 1054255, at *2 (Del. Ch.).
The excessiveness, coerciveness and unreasonableness of the $3,000,000
termination fee to be paid to Alliance is apparent if such termination fee is
compared to the $1,500,000 that Alliance is projected to earn during the
quarter ended March 31, 2002. Accordingly, the approval of such termination
fee by the Board also reflects a breach of fiduciary duty by the Board and a
violation of Delaware law by Liquid Audio. See Paramount Communications Inc.
v. QVC Network, Inc. 637 A.2d 34, 50-51 (Del. 1994).
Finally, the multi-layered termination fee provided under Section
7.3(b)(iii) of the Merger Agreement to be paid by Liquid Audio to Alliance if
the stockholders of Liquid Audio fail to approve the Merger Agreement and the
Merger, and, subsequently, Liquid Audio agrees to or consummates an
"Acquisition Proposal," or decides to liquidate or dissolve, is coercive in
nature and was adopted by the Board "to `interfere with or impede . . . [the
exercise of] the shareholder franchise.'" Chesapeake Corp. v. Shore, 771
A.2d 293, 345 (Del. Ch. 2000) (quoting Williams v. Geier, 671 A.2d 1368, 1376
(Del. 1996)). Accordingly, the approval of such termination fees also
reflects a breach of fiduciary duty by the Board and a violation of Delaware
law by Liquid Audio. See Eisenberg v. Chicago Milwaukee Corp., 537 A.2d
1051, 1061-62 (Del. Ch. 1987).
Most revealing of the intent of the Board in approving the Merger
Agreement and the Merger is the fact that Alliance is under no obligation to pay
any termination fee to Liquid Audio under any factual scenario. In sum, unless
Liquid Audio declares a date certain for the Annual Meeting while preserving the
previously announced May 20, 2002 record date, and agrees to terminate the
Merger Agreement, musicmaker intends to challenge the legality of the Merger
Agreement and request that consummation of the Merger be enjoined.
Sincerely,
/s/ Michael J. Maimone
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Michael J. Maimone
cc: Abbe L. Dienstag, Esquire (by facsimile transmission)