The Diamondbacks are being sued

The 2020 Major League Baseball season may be on hold, but the legal side of baseball continues unabated. Per The Athletic’s Zack Buchanan:

Three minority owners of the Diamondbacks claim that the club and managing general partner Ken Kendrick is illegally trying to force them to either increase their investment in the team or relinquish their stakes at a price the minority owners say is unfairly discounted, according to a lawsuit filed Tuesday in Maricopa County Superior Court.

The plaintiffs — Alfredo Molina, who is the chairman and CEO of Phoenix-based Molina Fine Jewelers; former pro pitcher Jim Weber; and limited liability company Carlise Investments — claim that the Diamondbacks’ ownership group, led by Kendrick, acted unlawfully when it told them each either to increase their investment in the team to at least a one-percent stake of ownership or sell each of their “ownership units” back to the team at a price of $60 per unit.

You can read the Complaint here. It’s pretty technical, so let me translate from the legalese. Essentially, the plaintiffs here are saying that they each owned a small stake - greater than one percent - in the legal partnership that owns the Diamondbacks. The plaintiffs say that Kendrick attempted to dilute their ownership interest to less than 1%, then told them that Major League Baseball required all ownership interests of less than 1% be bought out and terminated. In reality, allege the plaintiffs, MLB had issued no such directive. Instead, Kendrick had contacted MLB and requested approval for the plan, then falsely told minority investors that it was MLB who had originated the plan.

Intriguingly, this case is yet more fallout from the legalization of sports gambling. The plaintiffs are alleging that forthcoming gambling revenues are at the root of the dispute. According to the plaintiffs, Kendrick wanted to increase his own share of gambling revenue, and did so by attempting to eliminate minority partners. The plaintiffs also say that as a result of that revenue, the price that Kendrick assigned to their ownership interests was far below what it was actually worth.

The team, for its part, denies that it or Kendrick engaged in any wrongdoing.

“The Managing General Partner of the D-backs, with the support of Major League Baseball and on advice of independent legal counsel, has chosen to streamline the ownership group and reduce the number of partners with very minimal equity stakes in the partnership. Each of those investors was given the opportunity to remain as part of the group by purchasing additional partnership units at a rate determined by a highly respected, independent appraiser. The same rate was utilized to purchase back existing units from those who declined the offer to purchase new units. The overwhelming majority of investors chose one of these options. While it is unfortunate that the plaintiffs have chosen to decline the offer and take legal action, this decision is well within the rights of the Managing General Partner, who looks forward to the resolution of the matter.”

There are a few aspects of this lawsuit that should prove particularly intriguing. First, there is the matter of discovery. From the perspective of the merits of the lawsuit, it should be fairly straightforward to determine whether the requirement of streamlining equity came from MLB, as the team asserts, or from Kendrick, as the plaintiffs allege. The other aspects could be more complex, but will nonetheless give us a rare peek into the the inner financial workings of the team. After all, there are a number of ways the lawsuit could end - with a settlement for a larger payout for the plaintiffs’ ownership interests, with a court-ordered monetary payment, or by the plaintiffs retaining their ownership interests at a court-ordered percentage. As a result, we may be able to glean some understanding of just how teams value themselves - though doubtless there will be protective orders limiting what we see.

Second, there’s also the question of how the lawsuit will impact the team’s ongoing ballpark search.

On the most basic level, Buchanan is correct. At the same time, a new ballpark could have a substantial impact on the team’s valuation - and, as a result, the value of the plaintiffs’ shares. It’s not out of the realm of possibility, therefore, that the lawsuit could pose a non-negligible obstacle to a new ballpark, in that Kendrick will want to resolve the case before a new ballpark agreement is signed.

As for the plaintiffs’ likelihood of success, it’s unclear at this point. That Kendrick allegedly falsely told plaintiffs that MLB was driving the buyout, if true, would be an important fact of note, but it is not, by itself, enough to win the lawsuit. Still, plaintiffs here stand a very good chance of taking this case to trial, making it past both a motion to dismiss and summary judgment - and that in and of itself is noteworthy.