ImageSat Shareholder Suit May Affect $1.6 Billion Satellite Deal

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  Space News Business

ImageSat Shareholder Suit May Affect $1.6 Billion Satellite Deal

By BARBARA OPALL-ROME
Space News Correspondent
posted: 19 July 2007
03:19 pm ET








Tel Aviv
, Israel





In what may be the most potentially damaging lawsuit in Israeli aerospace history, minority shareholders of ImageSat International (ISI) are claiming some $6 billion in damages for a slew of alleged offenses associated with domestic production of Eros-series satellites and the sale of their high-resolution imagery abroad.



The 22-count complaint, filed July 2 in the U.S. Southern District Court of New York, accuses ISI, Israel Aerospace Industry Ltd. (IAI), Elbit Systems Ltd. and major investors of defrauding and devaluing ISI to benefit their own conflicting interests and those of Israel’s Ministry of Defense.





Minority shareholders are claiming rights or royalties to several ongoing commercial space initiatives, including a potential $1.6 billion deal signed last April between IAI and Northrop Grumman for up to eight synthetic aperture radar imaging satellites.

According to the plaintiffs, a July 2000 master agreement governing the relationship between IAI – the state-owned satellite producer – and ISI, the commercial owner and operator of Eros-series satellites, grants ISI rights to all technologies developed in the context of the Eros program.



Moreover, plaintiffs insist the agreement precludes IAI from independent initiatives involving the commercialization of IAI space technologies or competing programs in the commercial Earth observation market. As such, the plaintiffs aim to challenge plans by IAI and Elbit, through its wholly




-owned, payload providing Elop subsidiary, to bid for so-called turnkey projects on the international market, industry sources here said.





The plaintiffs claim that IAI overcharged and fraudulently imposed on ISI a second satellite that was known to be “seriously flawed” and ultimately proved “financially disastrous” for ISI.

The plaintiffs claim that ISI agreed to pay $82 million for its Eros-B satellite and was contractually bound by foreign customers to launch the enhanced capability satellite by 2004. However, as a result of the failed Sept. 2004 launch of the Ofeq-6 spy satellite, they claim ISI was forced into the




role of providing for Israel’s national security at the expense of shareholders and the company’s business plan.

Instead of receiving




an




$82 million satellite for launch in 2004 as it was entitled to, the plaintiffs, minority shareholder in ISI, claim the company was forced into accepting a $101 million Ofeq-6 replacement satellite whose design was rejected back in 1998.




Moreover, the plaintiffs say the two-year delay in receipt of the second satellite triggered tens of millions of dollars in lost annual business.

In a July 23 internal ISI letter filed with




the complaint, Patrick Rosenbaum, founding chief operations officer at ISI, detailed Eros-B design flaws that reduced the satellite’s minimal imaging time per orbit by 30 percent. “I want you to note that I oppose the possibility for [ISI] to be maneuvered into a situation where [ISI] would buy a crippled satellite at the price of a very sophisticated one,” Rosenbaum wrote.

The plaintiffs accused the IAI- and Elbit-dominated ISI board of directors of “pervasive deception” in their decision to write off the “impaired” satellite investment without demanding credit or compensation for its investment.

The Eros-B experience, the plaintiffs claim, demonstrated that ISI “is no longer in business to provide apolitical Earth observation satellite services for the proportional benefit of all its shareholders … Rather the company now exists for the principal benefit of the Israeli industrial shareholders … and more specifically to support and advance the regional national security interests and global geopolitical agenda of their anchor customer, the [Israeli Ministry of Defense]




.”



Plaintiffs also accused majority shareholders of obtaining alternative financing for their own benefit in contravention of company plans to conduct an initial public stock offering that would have benefited all ISI shareholders. Since suspension of the initial public stock offering planned by November 2005, “those in control of ISI have conspired to subordinate the Company’s commercial decision-making interests and the financial interests of the minority shareholders, including plaintiffs, entire to those of IAI and Elbit and to the political interests of [the Israeli Ministry of Defense],” the suit claims.

In a July 10 interview, ISI President Shimon Eckhaus rejected the plaintiffs’ claims and insisted ISI is in “fantastic condition” relative to its financial health and its relations with existing and prospective customers. He acknowledged, however, that the suit is growth-hampering and could require an enormous investment in company resources to defend against. “The sooner this issue is resolved the faster we will return to developing and growing this company to the benefit of our customers and shareholders,” Eckhaus said.

Bob Bishop, a spokesman for Northrop Grumman Space Technology, declined to comment on the litigation or its potential impact on the firm’s future plans with IAI.