Court Stalls Reader's Digest Stock Plan

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Reader's Digest postponed a vote by shareholders on a stock reorganization plan scheduled for yesterday after the Delaware Supreme Court barred any reorganization pending the resolution of a suit by several Reader's Digest investors.


The Supreme Court ruling Aug. 12 reversed an earlier favorable decision by the Delaware Chancery Court. William Adler, spokesman for Reader's Digest Association, Pleasantville, NY, said officials were reviewing the decision and had not decided what to do next.


In April, Reader's Digest announced its intention to create one common stock for the company. Its stock is currently split into Class B voting stock and Class A nonvoting stock. The majority of voting shares are controlled by the DeWitt Wallace Reader's Digest Fund and the Lila Wallace Reader's Digest Fund.


Under the recapitalization plan, the Wallace funds would relinquish control of Reader's Digest and receive $100 million in the process. After the changes, the funds would be reduced from a 50 percent voting majority to 14 percent. Nonvoting shareholders then would have a combined 78 percent of the vote.


The investors suing objected to the payout to the Wallace funds while other stockholders would receive nothing, according to reports.


The stock transaction would be paid for through financing from J.P. Morgan and Goldman Sachs, which also financed the Reader's Digest acquisition of Reiman Publications LLC, Greendale, WI.


Reader's Digest completed its acquisition of Reiman in May for $760 million. In conjunction with that, the company said it has finalized arrangements for $950 million of loan financing to pay for the acquisition, to repurchase $100 million of Class B voting common stock and to refinance other existing borrowing.


Though the recapitalization did not affect the Reiman acquisition, future company actions would be subject to a vote by all shareholders if it is allowed.


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