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The new dispute centers around founder John Fanning's suit to remove former basketball star John Hummer and ex-Napster CEO Hank Barry, two members of the Silicon Valley firm of Hummer Windblad Venture Partners, from the company's board.
NAPSTER SQUABBLING DELAYS BERTELSMANN BUY-OUT
Attempt to Remove Hummer and Barry Delays Sale of File-Sharer
Napster continues to line the pockets of attorneys as the one-time Internet darling struggles to survive.

Latest word is that Bertelsmann's attempt to buy the famed file-sharing service for $15 to $30 million has been derailed by internal struggles among the company's principals and investors.

The new dispute centers around founder John Fanning's suit to remove former basketball star John Hummer and ex-Napster CEO Hank Barry, two members of the Silicon Valley firm of Hummer Windblad Venture Partners, from the company's board.

Hummer Windblad originally invested $13.5 million in Napster two years ago. Fanning's lawsuit aims to prevent them from keeping most of the money from the proposed Bertlesmann purchase. Under terms of its investment, the venture capital firm is entitled to cash out before other shareholders.

Fanning and other Napster investors want to convert Hummer Windblad's preferred shares into common, meaning more shareholders would see money from a sale. Hummer and Barry claim the conversion is illegal. Fanning has asked the court to act quickly, citing an unspecified offer to acquire the company. Bertelsmann wants the dispute ended before it renews its bid, though sources close to the company claim they have not committed to the purchase. The German media giant has already loaned the Redwood City, CA, firm more than $60 million, giving it the right to take a large equity stake in it.

Napster Chief Exec Konrad Hilbers, who replaced Barry at the head of the company, insisted Fanning's suit was "legally groundless." Napster's board now consists of Fanning, who incorporated the firm in 1999, Hilbers, Hummer and Barry. Fanning's nephew Shawn, who wrote the software for the service, which attracted 50 million users at its height, still works at Napster, but is not on the board.

To avoid Hummer Windblad reaping most of the money from a purchase, Fanning and his allies activated clauses in the shareowner agreements that they claim permit them to covert preferred shares into common stock. They wish to replace Hummer and Barry on the board with Martin Kay, who works at Fanning's Internet company incubator and former Napster investor Yosi Amram.

The Bertelsmann purchase price is far less than what the company was once valued at on the open market as the fastest-growing Internet application in history. Napster has been developing a legitimate service that would pay copyright holders and is trying to reach a settlement with the labels, but the new version has been delayed several times already. The service has already seen illegitimate offspring such as Kazaa, Limewire and Morpheus emerge to take its place.

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