-324-
Second, Mr. Shapiro opined that it would not be rational for
CLIS to contribute the EBD film library to SMHC in its capacity
as an equity holder of SMHC because: (1) The face amount of
SMHC’s debt was greater than the value of its assets as of
December 10, 1996; and (2) SMHC’s creditors with priority claims
would capture the value of any contribution.222 Moreover,
although debt holders may generally have an incentive to make
additional investments to a company in proportion to their
claims, he observed that it would not be rational for one of the
debt holders on its own to undertake an investment that would
benefit it in an amount less than the cost of the investment.
Thus, because Generale Bank held a more significant debt claim in
SMHC, he opined that it would not be rational for CLIS to
contribute the EBD film library in its capacity as a debt holder
of SMHC. Mr. Shapiro concluded that “the true economic reality
of this transaction is that CLIS contributed the Film Rights to
SMP and not to SMHC.”223
222 Mr. Shapiro describes this phenomenon as the
“underinvestment problem”; i.e., debtholders will appropriate
value created by a new equity infusion, and, therefore, such
equity infusions do not occur. Mr. Shapiro assumed that Generale
Bank and CLIS were unrelated for purposes of his analysis.
223 Mr. Shapiro also observed that the $5 million advisory
fee exactly equaled SMP’s “cost basis” in the EBD film library.
On this basis, without elaboration, Mr. Shapiro concluded: “It
appears that CLIS was paid separately for its Film Rights in the
guise of an advisory fee, instead of being paid for the Film
Rights as part of the price paid for SMHC’s debt.”
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