Loral Space & Communications, Inc. (NDAQ:LORL) is facing an increasing amount of pressure from a large hedge fund who is now seeking to investigate a recent share purchase agreement with a board member. Highland Crusader Offshore Partners LP, a 5% stakeholder in the company, demanded to inspect books and records of the company to investigate possible mismanagement, breaches of fiduciary duty, corporate waste, and improper influence and conduct with respect to the negotiation, execution, and approval of a Securities Purchase Agreement that enabled Loral's controlling shareholder - MHR Fund Management LLC - the exclusive right to purchase from Loral shares of two newly created series of convertible preferred stock for $300 million.

What was the problem with the transaction? Well, according to the hedge fund, a lot:

1. The transaction appears on its face to be a sweetheart deal for MHR. The aptly timed transaction not only took place without any competitive bidding but also appears to have been "spring-loaded" in that shortly after the announcement of the SPA, Loral announced a series of positive business developments that caused its stock price to rise from $27 per share to $51 per share. And what was the conversion price of the SPA shares? They were set below the intrinsic value of Loral set by the bankruptcy courts only 18 months earlier at $30.15 per share.
2. The terms of the transaction were unfair and oppressive to Loral and its non-participating shareholders. The transaction provides for the issuance of shares to MHR representing approximately 50% of Loral's current equity, giving MHR the opportunity to increase its equity stake from 35.9% to 56%! Moreover, Loral had no need to accept an insider transaction carrying such unfair and onerous terms. The company had ample cash available, no identified need for the $300 million of capital, and no identified exigency that would force Loral to agree to such a deal.
3. The transaction entrenches current directors by giving MHR an enormous number of additional votes when their SPA's convert to common stock along with triggering punitive financial consequences due to a "change of control" in the board's composition under the terms of the transaction.
4. The board can no longer remain independent now that three of Loral's eight directors are affiliated with MHR, including the non-executive vice chairman of the board. Moreover, with the enormous voting power now granted, it is unlikely that the board would offer much opposition to MHR demands.
5. The transaction was with Loral's controlling shareholder, which was a fact that was disclosed publicly. Additionally, the company has said that MHR exercises significant influence over Loral's operating subsidiary, Loral Skynet.

While the outcome of this investigation obviously remains to be seen, there is certainly some shady aspects of this deal. This case only further demonstrates the occasionally negative influences that activist shareholders can have on companies - something that investors much watch carefully when evaluating investment opportunities.

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