Hipgnosis and co-founder Merck Mercuriadis face legal action

Hipgnosis Songs Fund, its investment advisor and co-founder Merck Mercuriadis, is in legal action filed by a company once owned by the Canadian.

The struggling music catalog investor is accused of engaging in “diverting business opportunities” from Hipgnosis Music Limited (HML) to the company and its investment advisor, Hipgnosis Song Management.

The lawsuit, filed by HML on behalf of creditors, further alleges that the “company unlawfully assisted Mr. Mercuriadis or received this alleged distraction,” Hipgnosis told investors on Thursday.

Mercuriadis, 60, was director of HML until it folded in 2018, the same year he founded Hipgnosis Songs Fund with Chic guitarist Nile Rodgers.

A native of Quebec, Mercuriadis founded the company after three decades managing iconic artists such as Elton John, Pet Shop Boys, Morrissey and Guns N’ Roses.

He and the two other accused parties have denied the allegations against them and plan to defend themselves “vigorously.”

However, they warned that Hipgnosis was not insured against the costs of fighting the claims.

Hipgnosis further announced on Thursday its intention to appoint advisers to carry out due diligence on its assets after PWC withdrew as auditor.

It’s part of a strategic review the London-based company began last month to determine ways to “maximize shareholder value.”

The company’s market capitalization has plummeted in recent years due to interest rate increases, making royalties relatively less attractive than other asset classes such as bonds.

Hipgnosis has also racked up massive debt by spending more than $2 billion buying back catalogs from some of the world’s most famous musicians, including Neil Young, Blondie, Shakira and the Red Hot Chili Peppers.

In a bid to reduce debt and finance a share buyback, the group agreed in September to transfer around 20 percent of its entire portfolio for £372 million to funds advised by asset manager Blackstone.

However, shareholders voted against the deal at an extraordinary general meeting on October 26 and also decided not to allow the company to operate as an investment trust.

A short time after the vote, Hipgnosis told investors they would not receive dividends for at least six months so it could fund catalog bonuses and adhere to debt covenants.

The Guernsey-registered company last month scrapped a planned interim dividend of 1.31 pence per share as its independent portfolio valuer, Citrin Cooperman, warned that royalty payments would be much lower than previously forecast.

Hipgnosis Songs Fund Shares were down 1.3 percent at 71.9 cents on Thursday afternoon and are down about 18 percent this year.