A Delaware bankruptcy court Tuesday has denied the bankrupt Redwood City-based Internet song-swapping service its $92 million proposed sale to Bertelsmann AG.
Blocking the sale means shut down-Napster has no revenue stream and no other buyers waiting in the wings. The company said it would likely be forced into Chapter 7 liquidation.
Napster CFO Carolyn Jensen was quoted Friday as saying the company would terminate its employees and cease operations if the bankruptcy court failed to approve the sale.
Chief Judge Peter J. Walsh of the U.S. Bankruptcy Court in Wilmington refused to allow the sale after the German-based media giant could not come up with enough evidence to show that its investment was made in good faith as opposed to an equity stake in the company.
The judge also questioned Napster CEO Konrad Hilbers' integrity as a part of the deal. Hilbers served as Bertelsmann executive vice president and chief administrative officer before coming to Napster.
"The deficiency [in evidence] in this case is so apparent it can't be cured by the sale auction process," Judge Walsh said. "It is abundantly clear Mr. Hilbers had one foot in the Napster camp and one foot in the Bertelsmann camp, and so tainted the sale. I can't remember the last time a debtor tried to get a sale like this approved without giving testimony of the people directly involved in the transaction.
The Music Publishers Association and the Recording Industry Association of America (RIAA) had been most vocal in trying to block Napster's sale to Bertelsmann. The two trade organizations have been fighting Napster in court over accused copyright infringement.
Bertelsmann was a major investor in Napster and had bankrolled the company through much of its legal trouble with the music industry. Bertelsmann even went as far as initially inking a deal to pay $8 million for the assets. The ultimate plan for Napster was to rekindle the peer-to-peer network as a legitimate subscription service.
But the court forced Napster's assets be put up for auction - an event that did not attract any takers to outbid Bertelsmann's $14 million offer.
Then over the weekend, Bertelsmann said it wanted to get out of many of its online units including its Bol.com book business as well as Napster.
"We accept the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase will not proceed," said a spokesman for Bertelsmann's DirectGroup division, which was responsible for the Napster deal.
Under Chapter 7 Bankruptcy, Napster will work with a court appoited trustee to liquidate its assets.