Teekay's Brookfield deal targeted in lawsuit

Hedge fund alleges that offshore partnership defrauded it in transaction involving preferred shares.

Teekay Offshore is the target of a lawsuit from an aggrieved hedge fund, which claims the offshore vessel partnership misrepresented its July deal with Brookfield Business Partners.

Cobalt Capital Management alleged it was "fraudulently induced" to sell preferred shares back to Teekay at a price that was "significantly lower" than what they were worth.

The New Jersey-based Cobalt, with $619m in equities under management, claims Teekay misled the firm about how the deal with Brookfield was structured.

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Teekay issued 4 million of the preferred shares last year, raising $100m. Cobalt's offshore fund bought 500,000 of the preferred shares.

The preferred shares had a "change in control" premium allowing the holder to redeem them for a 20% premium.

The premium comes when Teekay or one of its affiliates no longer owns more than 50% of the voting power or economic interest of Teekay Offshore's general partner.

But when Cobalt came to cash in its shares, Teekay representatives said the transaction was not a change in control. Cobalt then redeemed its shares for a 5% discount, resulting in a $3m loss on the sale.

Cobalt says the change-in-control premium should apply to those shares. Cobalt says the "Rube Goldberg" structure of the Teekay-Brookfield deal muddled who is in control of Teekay's general partner.

In addition to its direct $610m stake in Teekay Offshore, Brookfield also bought a 49% in the Teekay's general partner.

The kicker, Cobalt claims, is that Brookfield has the option to increase that stake to 51% at the time of closing the deal "without any limitation and nominal cost, if that."

"On that first day, then, Brookfield will hold a total of 51% of the economic interest of Teekay," Cobalt said in its lawsuit.

A Teekay representative said the company received the lawsuit, but "as a matter of policy we do not comment on any actions before the court."