SMALL MARKET RADIO NEWSLETTER FEBRUARY 18, 2010

LEGAL AFFAIRS

Securing Protection for Seller Paper

By Erwin G. Krasnow, John Pelkey and John W. King of Garvey Schubert Barer

If the seller provides the buyer with seller paper, what protection can the seller obtain to make sure that the station will be operated properly and that financial and other information will be provided on a timely basis after the closing? One seller sold the station assets for $4,000,000 and received the buyer's promissory note in the amount of $3,200,000. Since the seller paper accounted for the lion's share of the sales price, the seller wanted protection in addition to a security agreement (accompanied by a UCC-l filing), a trust deed on the real estate, and a pledge agreement from the three individuals who provided personal guarantees.

The asset purchase agreement provided for a series of "post closing covenants" by the buyer concerning the operation of the station in accordance with all laws and regulations, payment of all taxes, maintenance ofthe assets in good condition and repair, and keeping the assets free of liens and encumbrances. These covenants echo those that the seller provided for the period between execution of the contract and the closing.

Also, the buyer was required to keep the assets fully insured against fire, theft or vandalism and to name the seller as an additional insured under the policy and to "insure the life of one of the principals of the buyer" in an amount equal to the unpaid balance of the Note with the Seller named as beneficiary." The buyer was also obligated to provide the seller with quarterly financial statements.  The seller or an agent of the seller was given "the right at reasonable times during Buyer's normal business hours to inspect the assets and to inspect, audit and copy any books and records of Buyer relating to the Assets."  Although it would seem logical that the seller should be able to protect itselfby providing that the station will revert to the seller in the event that the buyer defaults on the seller paper, this type of reversionary interest is prohibited by the FCC's rules. Section 73.1150 of the Commission's rules is broadly worded. It provides that, in assigning a broadcast license, the licensee "may retain no right of reversion of the license, no right to reassignment of the license in the future, and may not reserve the right to use the facilities of the station for any period whatsoever." Moreover, the Commission staff takes the position that such a reversionary interest cannot be salvaged by including a requirement that FCC approval be obtained before the station is reassigned to the seller. Section 73.1150 can also be read to prevent a seller from holding rights to provide programming over the station once the closing occurs. In an agreement for the sale of a noncommercial educational radio station, the parties included a provision whereby the seller would hold a right of first refusal to "prepare, produce, present on-air, and sell course materials for" college level courses to be aired on the station if the buyer ever proposed to offer such college-level courses as programming on the station. The FCC staff objected to this provision and the parties found it necessary to file an amendment to the purchase agreement that struck this provision. According to the amendment, the parties agreed to strike the provision because the FCC staff had advised counsel for the parties that the provision "must be deleted to bring the Agreement into compliance with FCC rules and policy."

Erwin Krasnow (ekrasnow@gsblaw.com), John Pelkey Cipelkey@gsblaw.com), and John W. King Ciking@gsblaw.com) are partners at Garvey Schubert Barer and the coauthors of Profitably Buying and Selling Broadcast Stations. The book can be ordered by calling 1-800-288-2677, ext. 5024, or by visiting W\o\w.iuniverse.com.

SMALL MARKET RADIO NEWSLETIER FEBRUARY 18, 2010· PAGE 11

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