Everyone in the EDM community has been watching the very public downfall of SFX Entertainment. Once the proud parent company for Tomorrowland, Q-Dance, Disco Donnie Presents, Beatport, and a host of other EDM properties, SFXE is now embroiled in a brutal Chapter 11 bankruptcy. Less public has been the maneuvering by ex-CEO Robert Sillerman to remain in money and in power, but the very banks that helped him at the onset of their bankruptcy are now turning their guns toward him.
Here it is in a nutshell: SFX went into bankruptcy owing a lot of people a lot of money. The goal was to sell off most of their properties (many of which investors believe were bought at a premium), install a new CEO (which most investors believe will be ex-AEG man Randy Phillips), and re-emerge as a lean event production company. SFX Entertainment 2.0.
The problem for ex-CEO Sillerman? Things aren’t going according to his plan. Before SFX went into bankruptcy, things weren’t rosy. Sillerman (then the CEO) signed aggressive loan deals with banks to finance the company. In exchange, the banks would get first go at SFX-owned companies should they collapse. SFX was now “highly-leveraged” as a company, meaning that debt financed most of their operations.
When SFX finally succumbed and entered Chapter 11, Sillerman had a plan. Amplify writer Dave Brooks summarizes: “Bob Sillerman’s plan to emerge from bankruptcy was simple — step down as CEO of SFX, but retain his chairmanship [of the SFX board] through his 40% stake of preferred stock in the EDM giant. Going into bankruptcy allowed him to wipe out the common stock shareholders and write down the big payments he made to buy up EDM promoters from around the world. He’d sell off a few assets, shut down a few festivals and still keep his health insurance, company car and New York office.”
As you might imagine from the headline of this article, things aren’t going according to plan. See in bankruptcy the people you owe money to hold most of the bargaining chips. Sillerman, in an effort to keep his plan in motion, agreed to even more aggressive debt deals with the banks he owed to. As of this week, the banks finally said enough to the debt rabbit hole and called Sillerman’s tab.
SFXE’s debtors filed a new restructuring agreement (RSA) this week that would effectively wipe out Sillerman’s stock in SFXE and possibly take him to court personally for the money owed. In more detailed terms, the banks are requesting the court allow them to wipe out all SFX shareholders, remove the entire board, and start from scratch — effectively shoving Sillerman out of the picture.
The RSA also includes language that would allow the banks to sue Sillerman for “general breaches of fiduciary duty including insider transactions and funding issues.” That’s a fancy way of saying Sillerman actively avoided his duty as CEO to put the needs of his company and the company’s financiers first, something a CEO is bound by contract to do. This, combined with the fact that the new RSA doesn’t include Sillerman in a blanket release of all debts, means the table is set for a court battle.
Delaware bankruptcy judge Mary Walrath will rule on the new RSA on Aug. 30. Until then, we can only hope that the companies and festivals we love won’t be harmed in what is almost certain to be a protracted legal battle.