IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MATTHEW SCIABACUCCHI, )
Individually and on Behalf of All Others
)
Similarly Situated, )
Plaintiff, )
)
v. ) C.A. No. 11418-VCG
)
LIBERTY BROADBAND )
CORPORATION, JOHN MALONE, )
GREGORY MAFFEI, MICHAEL )
HUSEBY, BALAN NAIR, ERIC )
ZINTERHOFER, CRAIG JACOBSON, )
THOMAS RUTLEDGE, DAVID )
MERRITT, LANCE CONN, and JOHN )
MARKLEY, )
)
Defendants, )
)
and )
)
CHARTER COMMUNICATIONS, INC. )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: February 21, 2017
Date Decided: May 31, 2017
Kurt M. Heyman and Melissa N. Donimirski, of HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; OF COUNSEL: Jason M. Leviton and Joel
A. Fleming, of BLOCK & LEVITON LLP, Boston, Massachusetts, Attorneys for
Plaintiff.
Martin S. Lessner, David C. McBride, James M. Yoch, Jr., and Paul J. Loughman, of
YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF
COUNSEL: William Savitt and Anitha Reddy, of WACHTELL, LIPTON, ROSEN
& KATZ, New York, New York, Attorneys for Defendants Michael Huseby, Balan
Nair, Eric Zinterhofer, Craig Jacobson, Thomas Rutledge, David Merritt, Lance
Conn, John Markley, and Charter Communications, Inc.
Donald J. Wolfe, Jr., Peter J. Walsh, Jr., Brian C. Ralston, Tyler J. Leavengood,
Jaclyn C. Levy, and Aaron R. Sims, of POTTER ANDERSON & CORROON LLP,
Wilmington, Delaware; OF COUNSEL: Richard B. Harper, of BAKER BOTTS
LLP, New York, New York, Attorneys for Defendants Liberty Broadband
Corporation, John Malone, and Gregory Maffei.
GLASSCOCK, Vice Chancellor
This matter involves a complicated set of transactions, as the reader interested
enough to persevere will discover. The questions it presents are not complex,
however, at least at this stage of the pleadings. The directors of the Nominal
Defendant, Charter Communications, Inc. (“Charter” or the “Company”), structured
an acquisition of two other entities in the same industry, communications media, as
Charter. Both acquisitions—the purchase of non-party Bright House Networks,
LLC (“Bright House”) and the merger with Time Warner Cable (“TWC”)—were
accomplished at the same time. Those transactions (the “Acquisitions”) are not
themselves the direct cause of the Plaintiff’s Complaint; all parties agree that these
transactions contributed value to Charter.
The Plaintiff is a Charter stockholder. His Complaint focuses on two related
transactions: The Defendant directors of Charter issued equity to an insider, the
largest stockholder of Charter, Defendant Liberty Broadband Corporation,
purportedly to finance the Acquisitions in part. According to the Plaintiff, Liberty
Broadband controlled Charter, and caused the Defendant directors and officers of
Charter to structure the issuances of equity in a way favorable to Liberty Broadband
and detrimental to Charter. The Complaint alleges that all these Defendants
breached duties of loyalty, owed to Charter as well as to its stockholders directly,
with respect to these transactions (the “Liberty Share Issuances” or “Issuances”).
The Plaintiff contends that the Issuances were not necessary to the financing of the
1
Acquisitions. The Plaintiff also alleges breaches of duty in connection with an
additional transaction by which Liberty Broadband received a 6% voting proxy (the
“Voting Proxy Agreement”). The Liberty Share Issuances and the Voting Proxy
Agreement were approved in a single vote by the majority of the stock of Charter
not controlled by or affiliated with Liberty Broadband, separate from the vote
approving the merger with TWC.1
The matter is currently before me on Defendants’ motions to dismiss. As
stated, the Plaintiff contends that Liberty Broadband controls Charter, and that, as a
result, entire fairness review applies to his claims. The Defendants argue strenuously
that Liberty Broadband is not a controller. I find—after review of the record,
including a stockholders’ agreement, referenced in the Complaint, that limits Liberty
Broadband’s ability to assert its will over Charter—that the Complaint fails to plead
sufficient non-conclusory facts to make it reasonably conceivable that Liberty
Broadband controls Charter.
Next, the Defendants argue that the Defendant directors were independent and
disinterested, and that the Complaint fails to state a claim. They also raise what I
consider a predicate impediment to the Plaintiff, which the Defendants contend
1
The Plaintiff also complains that, in the TWC merger, Liberty Broadband received more Charter
stock (and less cash) in consideration for its TWC stock than did other TWC stockholders,
presumably in a manner dilutive of the voting power of unaffiliated Charter stockholders. This
consideration differential was approved in the same vote as the Voting Proxy Agreement and the
Liberty Share Issuances.
2
requires dismissal. The Defendants argue that the vote of the majority of unaffiliated
stock in favor of the Liberty Share Issuances (and the Voting Proxy Agreement)
cleanses any breaches of duty complained of, under the rationale of Corwin v. KKR
Financial Holdings LLC.2 Under Corwin, a fully informed, uncoerced vote of the
majority of disinterested stock results in business judgment review attaching to the
transaction so approved, leading to dismissal absent an adequate pleading of waste.3
The rationale behind Corwin is hardly new; it amounts to a judicial recognition that
the agency problems inherent in transactions made by directors involving the
property of the stockholders are obviated by a vote of those stockholders in favor of
the transaction, so that the will of the owners effectively supersedes that of the
agents. In other words, there is little utility in a judicial examination of fiduciary
actions ratified by stockholders. “For sound policy reasons, Delaware corporate law
has long been reluctant to second-guess the judgment of a disinterested stockholder
majority that determines that a transaction with a party other than a controlling
stockholder is in their best interest.”4
I first turn, then, to the effect of the votes in favor of the Liberty Share
Issuances. Corwin will not apply if the vote was coerced. If a controller stood on
both sides of the transaction, the inherent coercion worked on the minority
2
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
3
See id. at 308–309; Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016).
4
Id. at 306.
3
stockholders in the face of the intentions of the controller renders the vote
insufficient to ratify the transaction.5 I have already noted, for reasons I will explain
below, that Liberty Broadband does not control Charter. Still, ratification will not
cleanse a transaction where the vote is structurally coercive, as where the directors
have created a situation where a vote may be said to be in avoidance of a detriment
created by the structure of the transaction the fiduciaries have created, rather than a
free choice to accept or reject the proposition voted on. In other words, a dismissal
based on ratification represents a determination by the Court that the stockholders
have found the challenged transaction to be in the corporate interest. If the vote was
structured in such a way that the vote may reasonably be seen as driven by matters
extraneous to the merits of the transaction, the Court cannot determine that the
stockholders demonstrated thereby a determination that the challenged transaction
was in the corporate interest. Such a vote is structurally coercive, and no cleansing
by ratification obtains. The result is simply that a traditional analysis of the
sufficiency of the complaint must follow.
Here, the Defendant directors were able to contract to acquire Bright House
and TWC in a way that added value to Charter. They chose to finance those deals
5
Business judgment in such a situation may nonetheless apply if a sufficient and independent
special committee negotiates the deal with the controller, and the deal is conditioned from the
outset on a positive vote of the majority of the unaffiliated shares. See Kahn v. M & F Worldwide
Corp., 88 A.3d 635, 644 (Del. 2014).
4
partially with an issuance of additional equity to Charter’s largest stockholder,
Liberty Broadband. According to the Complaint, the Defendant directors were
either self-interested or not independent of Liberty Broadband (and its principal,
Defendant John Malone) in approving these financing transactions. The Liberty
Share Issuances themselves, together with the Voting Proxy Agreement, according
to the Complaint, were structured by the Defendants to transfer wealth and voting
power from Charter and its unaffiliated stockholders to Liberty Broadband. The
Defendant directors then submitted the Liberty Share Issuances and Voting Proxy
Agreement for stockholder approval in a vote separate from the vote by which the
TWC merger was effectuated. Nonetheless, the Defendant directors informed the
stockholders that the lucrative acquisitions of Bright House and TWC were
expressly conditioned on stockholder approval of the Liberty Share Issuances and
Voting Proxy Agreement on the terms presented. In other words, to get the clear
benefit of the acquisitions of Bright House and TWC, the stockholders had to
swallow the pill of the Liberty Share Issuances and Voting Proxy Agreement.
Of course, there is nothing inherently nefarious in the latter: directors can act
within their business judgment in the structuring of a transaction or the issuance of
equity. But that is not the question here, in the first instance. The threshold question
here is, assuming that wrongdoing by the Defendants inheres in the Liberty Share
Issuances (and Voting Proxy Agreement), is it nonetheless cleansed by the ratifying
5
vote of the stockholders? In other words, did the stockholders, in a free and informed
vote, approve the actions of the Defendants in the structure and consummation of
the Issuances and Voting Proxy Agreement? Under the unique circumstances here,
I find the answer is no.
I understand that some method of financing is inherent in every transaction,
and typically an informed vote of the majority of the stock in favor of the transaction
ratifies the directors’ actions with respect to financing. Certainly, if a deal cannot
proceed absent adoption of a particular financing, an informed vote for such a
transaction is cleansing with respect to the financing method chosen. The Complaint
here alleges that the directors separately, and for reasons unrelated to the business
interest of Charter, chose to issue equity to an insider, then coerced acceptance of
the inequitable issuance by tying it to approval of the underlying transaction. The
Complaint alleges that Charter could “easily” have consummated the transactions
without issuing equity to Liberty Broadband. Such a pleading, if merely conclusory,
might be unpersuasive to implicate coercion. Here, however, the contents and
omissions of the definitive proxy statement are telling. At least as far as the
pleadings and current record disclose, the board did not determine that the
Acquisitions could be consummated only via the Liberty Share Issuances and Voting
Proxy Agreement. The directors did not seek or receive a fairness opinion that the
Liberty Share Issuances, standing alone, were fair to the Company or the
6
stockholders. What the Complaint and proxy do disclose is that Liberty Broadband
wished to make an additional equity investment in Charter, and communicated that
to the Defendant directors, who then structured the Liberty Share Issuances. These
are the facts from which I must infer whether the Liberty Share Issuances and the
Voting Proxy Agreement are an integral part of the Acquisitions, or interested
separate transactions for which the Defendant directors coerced stockholder
approval.
Here, the Plaintiffs have pled facts making it reasonably conceivable that the
vote was structurally coercive. Those facts, and the favorable inferences therefrom,
indicate that the Defendant directors achieved value for the stockholders in the
Acquisitions. They then conditioned receipt of those benefits on a vote in favor of
transactions extraneous to the Acquisitions, the Liberty Share Issuances and the
Voting Proxy Agreement. Assuming that viable breaches of fiduciary duty inhere
in the Liberty Share Issuances (and the Voting Proxy Agreement), they cannot be
cleansed by the vote, since that vote was not a free vote to accept or reject those
transactions alone; it was a vote to preserve the benefit of the Acquisitions. In other
words, ratification can cleanse defects inherent in a transaction, because the
stockholders can simply reject the deal. Fiduciaries cannot interlard such a vote with
extraneous acts of self-dealing, and thereby use a vote driven by the net benefit of
the transactions to cleanse their breach of duty. Upon consideration, for reasons
7
detailed in this Memorandum Opinion, I find that the Plaintiff has adequately pled
facts that raise a pleading-stage inference that the Liberty Share Issuances and the
Voting Proxy Agreement are extraneous to the Acquisitions, and that a vote in favor
of the Issuances and Voting Proxy Agreement was a condition of receiving the
benefits of the Acquisitions.
“Coercion” is a loaded term, but a vote so structured by the Defendants, to
accept one (allegedly self-interested) transaction so as not to lose the benefit of
another independent transaction, cannot to my mind be considered uncoerced. Put
another way, a vote so structured does not eliminate the agency problem by
substituting the will of the stockholder/owners for that of the directors, because the
directors have structured the vote in such a way that the vote must be in consideration
of factors extraneous to the matter voted on. The stockholders did not decide,
necessarily, that the Liberty Share Issuances and the Voting Proxy Agreement were
“in their best interest,” they only decided that the Acquisitions and the Issuances and
Voting Proxy Agreement were, on net, beneficial. The facts are sufficient to an
inference that the Liberty Share Issuances (and the Voting Proxy Agreement) were
unnecessary to the Acquisitions. If so, and if such a vote were cleansing, then
fiduciaries could attach self-dealing riders to any transaction under consideration,
and avoid being held to account by a favorable stockholder vote. That is not equity;
it would represent, not a cleanse, but a white-wash.
8
The result of this determination—that there is no controller but that Corwin
does not apply due to structural coercion—simply means that the business judgment
rule is not imposed via ratification under Corwin. Instead, I must consider whether
the Complaint sufficiently states a claim. First, I must determine whether the claims
alleged are derivative or direct. If the latter, they must withstand scrutiny under Rule
12(b)(6) to see if viable claims have been stated; if the former, the Complaint must
make the more formidable demonstration required under Rule 23.1 as well. In that
case, the Complaint must raise a reasonable doubt that the directors could exercise
business judgment in evaluating a demand, making such a demand futile, before the
Plaintiff may proceed on behalf of Charter.
Such an analysis is problematic based on the briefing. The Complaint, and
the Plaintiff’s briefing, assert in a conclusory way that this matter is both direct and
derivative; the Defendants are equally cursory in briefing, alleging that, if the claims
are derivative, demand has not been made and is not excused. Because Corwin is
inapplicable here, the standard of review on these motions to dismiss will depend on
the nature of the claims. I therefore reserve on the balance of the Motions to Dismiss
so that the parties can address this issue with supplemental briefing. My reasoning
follows.
9
I. BACKGROUND6
A. The Parties
Plaintiff Matthew Sciabacucchi was a stockholder of Charter at the time of
the Acquisitions and maintains his ownership of Charter today.7 The Plaintiff seeks
to bring this action on behalf of himself and as a class action on behalf of Charter
stockholders, as well as derivatively.8 Defendant Liberty Broadband is incorporated
in Delaware and maintains its headquarters in Colorado.9 Liberty Broadband
originally was a wholly-owned subsidiary of Liberty Media Corporation (“Liberty
Media”).10 Liberty Media spun-off Liberty Broadband in 2014 so that now both
Liberty Media and Liberty Broadband are separate, publicly traded companies (the
“Liberty Broadband Spin”).11 Liberty Broadband owns approximately 26% of
Charter stock, making it Charter’s largest stockholder.12
Defendant John Malone has been on the Board of Charter since May 2013 as
a Liberty Broadband designee.13 Malone owns approximately 47% of the “aggregate
voting power” in both Liberty Media and Liberty Broadband and is the chairman of
6
The facts, drawn from Plaintiff’s Verified Amended Class Action Complaint (the “Complaint”)
and from documents incorporated by reference therein, are presumed true for purposes of
evaluating Defendants’ Motions to Dismiss.
7
Compl. ¶ 11.
8
Id. at ¶ 1.
9
Id. at ¶ 12.
10
Id.
11
Id.
12
Id. at ¶ 2.
13
Id. at ¶ 13.
10
the board of directors of both companies.14 Malone also chairs the board of directors
of Liberty Interactive Corporation and Liberty Global plc (“Liberty Global”), of
which he owns 37% and 30%, respectively.15 Malone is also a member of the board
of directors of Discovery Communications, Inc. (“Discovery”), in which he holds a
28.9% voting interest for director elections.16 Malone also previously served as
chairman of the board of directors of the television network Starz, which was spun
off from Liberty Media in 2013, and he still holds 46% of Starz voting power.17
Malone is also a member of the board of directors of Lions Gate Entertainment
Corporation (“Lionsgate”) and owns 3.4% of Lionsgate stock.18 Lionsgate “sold an
additional 3.4% stake to Discovery and another 3.4% stake to Liberty Global” in
November 2015.19 Malone and Liberty Broadband are referred to collectively as the
“Stockholder Defendants.”
Defendant Gregory Maffei has served on Charter’s Board since May 2013 as
a Liberty Media designee.20 Maffei is also the president and CEO of Liberty Media
and Liberty Interactive.21 Maffei holds a cornucopia of board memberships, and
serves as the chairman of the boards of Live Nation Entertainment, Inc., Sirius XM
14
Id. at ¶¶ 12–13.
15
Id. at ¶ 13.
16
Id.
17
Id.
18
Id.
19
Id.
20
Id. at ¶ 17.
21
Id.
11
radio, Inc., Starz, and TripAdvisor, Inc.22 He is also a director of Zillow, Inc. and a
former director at Barnes & Noble, Inc. (“Barnes & Noble”) as Liberty Media’s
appointee.23
Defendant Michael Huseby has served on the Charter Board since May 2013
when Liberty Media appointed him to the position.24 Previously, Huseby was the
CFO at AT&T Broadband from 1999 to 2002.25 He then served as Charter’s CFO
from 2002 to 2004 and subsequently as the CFO of Cablevision Systems Corporation
(“Cablevision”) from 2004 to 2011.26 When the Transactions were announced,
Huseby “was the CEO and a director of Barnes & Noble, Inc., of which Liberty
Media owned a 17% stake until 2014.”27 Huseby now serves as the Executive
Chairman of the board of Barnes & Noble Education, Inc., “which was spun off of
Barnes & Noble.”28
Defendant Craig Jacobson is an entertainment lawyer and has served on the
Charter Board since July 2010.29 Jacobson also serves on the boards of Expedia,
Inc. and Aver Media and previously was a director of Ticketmaster until it merged
22
Id.
23
Id. at ¶¶ 17, 49.
24
Id. at ¶ 15.
25
Id. at ¶ 51.
26
Id. at ¶ 50.
27
Id. at ¶ 15.
28
Id.
29
Id. at ¶¶ 16, 60.
12
with Live-Nation, Inc.30 Jacobson co-founded New Form Digital Studios, which is
a joint venture with Discovery,31 Brian Grazer, and Ron Howard.32
Defendant David Merritt has served on the Charter Board since December
2009.33 He is also Chairman of the Board’s Audit Committee.34 Merritt previously
worked at KPMG for twenty-five years, where he “served in a variety of capacities”
such as “the national partner in charge of the media and entertainment practice.”35
Merritt is the president of BC Partners, Inc., which, while he worked there, “engaged
in a transaction with Liberty Global.”36 Merritt also serves as a director of Buffet
Restaurant Holdings, Inc., Calpine Corporation, and Taylor Morrison Home
Corporation.37
Defendant Thomas Rutledge has been the CEO of Charter and served as one
of its directors since February 2012.38 Rutledge previously worked as the COO of
Cablevision and prior to that worked at American Television and Communications,
a predecessor company to Time Warner Cable.39 He currently serves as a director
30
Id. at ¶ 16.
31
Malone possesses a 28.9% voting interest in Discovery and serves on its board of directors. Id.
at ¶ 59.
32
Id.
33
Id. at ¶ 19.
34
Id.
35
Id.
36
Id.
37
Id.
38
Id. at ¶ 21.
39
Id.
13
for CableLabs and C-SPAN.40 As of the time of the Complaint, Rutledge was
expected to remain as CEO of New Charter—the newly formed parent company of
Charter created as a result of the Acquisitions.41
Defendant Eric Zinterhofer has served on the Board of Charter since 2009
“and has been its non-executive chairman since December 1, 2009.”42 Zinterhofer
previously worked as a partner at Apollo Management L.P. and Morgan Stanley
Dean Witter & Co.43 He is one of three founding partners of the private equity firm
Searchlight Capital Partners, LLC.44 Zinterhofer is also a director of Leo Cable,
LLC (“Leo Cable”), Dish TV India Ltd., Integra Telecom, Inc., and Hunter Boot,
Ltd.45 Leo Cable is a joint venture between Searchlight and Liberty Global, each of
which holds a 40% and 60% stake, respectively.46 In November 2012, Leo Cable
purchased San Juan Cable LLC, d/b/a One Link Communications for approximately
$585 million. Two years later, in December 2014, Searchlight and Liberty Global
“teamed up again to purchase the parent of Puerto Rico Cable Acquisition Company
Inc., d/b/a Choice Cable TV” for $272 million.47 Choice Cable was then combined
40
Id.
41
Id.
42
Id. at ¶ 22.
43
Id.
44
Id. at ¶¶ 22, 55.
45
Id. at ¶ 22.
46
Id. at ¶¶ 22, 55. The Complaint refers to this Leo Cable joint venture as both a LLC and a LP.
See id. Because the structure of this entity does not affect my decision here, I assume both Leo
Cable LLC and Leo Cable LP refer to the same entity.
47
Id. at ¶ 56.
14
with Liberty Cablevision of Puerto Rico LLC to become the largest cable operator
in Puerto Rico, 40% owned by Searchlight and 60% owned by Liberty Global.48
Defendant Balan Nair has served on the Board of the Company since May
2013 as a Liberty Media appointee.49 Nair is an executive vice president and chief
technology officer for Liberty Global.50 He also serves as a director of Adran
Corporation and Telenet Group Holdings, N.V., which is a subsidiary of Liberty
Global.51 Defendant John Markley, Jr. has served on the Charter Board since
November 2009.52 Markley is a managing director for Bear Creek Capital
Management, a director of Broadsoft, Inc., Millennial Media, Inc., and “several
private companies.”53 Defendant W. Lance Conn has served on the Board of Charter
since 2009 and was an officer of Charter Investment, Inc.54 Malone, Conn, Huseby,
Jacobson, Maffei, Markley, Merritt, Nair, Rutledge and Zinterhofer are referred to
collectively as the “Director Defendants.”
Nominal Defendant Charter is a Delaware corporation headquartered in
Stamford, Connecticut.55 Charter is one of the largest cable providers in the United
48
Id. at ¶¶ 55–56.
49
Id. at ¶ 20.
50
Id.
51
Id.
52
Id. at ¶ 18.
53
Id.
54
Id. at ¶ 14.
55
Id. at ¶ 24.
15
States.56 Charter’s Board of Directors (the “Board”) consists of ten members—the
previously discussed Director Defendants.57 Charter’s amended and restated
certificate of incorporation (the “Certificate of Incorporation”) puts restrictions on
“Business Combinations” between Charter and an “Interested Stockholder.”58 The
Certificate of Incorporation defines an Interested Stockholder as “any person . . .
who is, or has announced or publicly disclosed a plan or intention to become, the
Beneficial Owner of Voting Stock representing ten percent (10%) or more of the
votes entitled to be cast by the holders of all then outstanding shares of Voting
Stock.”59 The Certificate of Incorporation defines a Business Combination as,
among other things, “any merger or consolidation” with an Interested Stockholder;
“any . . . transfer or other disposition or hypothecation of assets of the Corporation .
. . to or for the benefit of” an Interested Stockholder; any “issuance by the
Corporation . . . of securities to” an Interested Stockholder; and any “transaction . .
. that . . . has the effect, directly or indirectly, of increasing the proportionate share
of any class or series of capital stock . . . of the Corporation . . . Beneficially Owned
by any Interested Stockholder.”60 Article Eighth prohibits Business Combinations
56
Id.
57
Id. at ¶¶ 13–22.
58
See July 25, 2016 Transmittal Affidavit of James M. Yoch, Jr., Esquire (“Yoch Aff.”) Ex. A at
Ex. 3.1 (“Amended and Restated Certificate of Incorporation of Charter Communications, Inc.”
hereinafter the “Certificate of Incorporation”). I note that the papers reference these sources in the
Yoch Aff. as “Yoch Decl.”
59
Id. at Art. 8(a), (b)(vi).
60
Id. at Art. 8(a), (b)(i).
16
from proceeding unless two conditions are met: (1) “a majority of the Continuing
Directors” determining, “after consultation with their outside legal and financial
advisors,” that the Business Combination “is fair to the Corporation and its
stockholders;” and (2) “holders of not less than a majority of the votes entitled to be
cast by the holders of all of the then outstanding shares of Voting Stock . . . voting
together as a single class, excluding Voting Stock Beneficially Owned . . . by any
Interested Stockholder or any Affiliate or Associate of such Interested Stockholder”
approving the transaction.61
B. Significant Non-parties
Non-party Advance/Newhouse Partnership (“Advance/Newhouse”) is “a
privately owned New York partnership headquartered in Syracuse, New York . . .
controlled by two brothers, Donald Newhouse and Si Newhouse, Jr.”62
Advance/Newhouse controls 22% of the aggregate voting power of Discovery,
which has three Advance/Newhouse designees on its board of directors.63 Non-party
Bright House was, before the transactions in this matter, a wholly owned subsidiary
of Advance/Newhouse and was “the sixth-largest owner and operator of cable
systems in the United States.”64 Non-party Goldman Sachs is an investment bank
61
Id. at Art. 8(a). A “Continuing Director” with respect to an Interested Stockholder is “any
member of the Board of Directors . . . who is not an Affiliate or Associate or representative of such
Interested Stockholder.” Id. at Art. 8(b)(v).
62
Compl. ¶ 26.
63
Id.
64
Id. at ¶ 27.
17
that advised Charter in connection with the Acquisitions.65 A boutique investment
bank, non-party LionTree, also advised Charter in connection with the
Acquisitions.66
C. Factual Overview
1. The Original Liberty Transaction and Stockholders Agreement
On May 1, 2013, Liberty Media purchased approximately 26.9 million shares
of Charter with warrants to purchase 1.1 million additional shares for $2.6 billion
(the “Original Liberty Transaction”).67 As part of this transaction, Charter and
Liberty Media entered into a stockholders agreement (the “Original Stockholders
Agreement”).68 As long as Liberty Media continued to own at least 20% of the
outstanding Class A common stock of Charter, the Original Stockholders Agreement
entitled Liberty Media to designate up to four persons “as nominees for election to
the Board at least until January 2016” and provided that one of those designees
would serve on each of the Board’s Audit, Nominating and Corporate Governance,
and Compensation and Benefits Committees.69 Charter was obligated to nominate
Liberty Media designees to the Board, but could elect to terminate this obligation by
65
Id. at ¶ 29.
66
Id. at ¶ 30.
67
Id. at ¶ 32.
68
Id. at ¶ 34. I have repeatedly noted that the inability of counsel to agree on shorthand terms for
entities and transactions in briefing makes the Court’s job more difficult. Such inability was on
display here. Of course, coming up with better shorthand terms demonstrates creativity; I remind
counsel that while creativity may serve virtue, it is not a virtue of itself.
69
Id.
18
providing notice to Liberty Media starting in January 2016.70 Upon the close of the
Original Liberty Transaction, “Liberty Media submitted four designees who were
immediately added to the Board: Malone, Maffei, Nair, and Huseby” (the “Liberty
Media Designees,” and subsequently the “Liberty Broadband Designees”).71
The Original Stockholders Agreement restricted Liberty Media from
acquiring “more than 35% of Charter’s voting stock before January 2016 or more
than 39.99% of Charter’s voting stock thereafter.”72 Charter agreed to refrain from
adopting any takeover device that would prohibit Liberty Media from accumulating
up to 39.99% of Charter’s outstanding stock.73 Liberty Media also agreed to
standstill provisions that “prohibited it from, among other things, engaging in any
solicitation of proxies or consents.”74 However, if Charter elected to terminate its
obligation to nominate Liberty Media’s designees to the Board, these standstill
provisions would also terminate.75 Starting in 2017, Liberty Media and Charter each
would hold “an annual right to terminate the Board nomination and standstill
obligations by delivering notice to the other party of such termination in early
January of such year.”76
70
Id. at ¶ 36.
71
Id. at ¶ 33.
72
Id. at ¶ 35.
73
Id. at ¶ 34.
74
Id. at ¶ 35.
75
Id. at ¶ 36.
76
Id.
19
The Original Stockholders Agreement was amended on September 29, 2014
in connection with the Liberty Broadband Spin. As part of the amendment, entered
into between Liberty Media, Liberty Broadband, and Charter; Liberty Media
assigned all of its rights under the Original Stockholders Agreement to Liberty
Broadband (the “Amended Stockholders Agreement”).77 “Liberty Broadband
assumed all such rights and agreed to perform all such obligations and Charter
consented to the rights’ assignment and assumption.”78 In other words, pursuant to
the Amended Stockholders Agreement, Liberty Broadband could designate at most
four of ten directors, could not acquire more than 35% of Charter stock, and could
not solicit proxies.
2. SEC Filings
“As of June 10, 2015, Liberty Broadband owned approximately 25.74% of
Charter’s Class A common stock.”79 If Liberty Broadband’s investment in Charter
was “deemed to become passive,” then it would be subject to regulation under the
Investment Company Act of 1940 (the “1940 Act”).80 More specifically, to avoid
the strictures of the 1940 Act arising from its investment in Charter, Liberty
Broadband had to show “either directly or . . . through controlled companies,” it was
77
Id. at ¶ 37.
78
Id.
79
Id. at ¶ 38.
80
Id. at ¶ 40.
20
“primarily engaged in business or businesses other than that of investing,
reinvesting, owning, holding, or trading in securities.”81
Liberty Broadband naturally sought to avoid 1940 Act regulation, which,
according to Liberty Broadband, could have resulted “in significant registration and
compliance costs,” required “changes to [its] corporate governance structure and
financial reporting, . . . restrict[ed] [its] activities going forward,” and “adversely
impact[ed] [its] existing capital structure.”82 On September 12, 2014, Liberty
Broadband wrote a public letter to the SEC explaining that
if (i) Charter is primarily controlled by Broadband; (ii) through Charter,
Broadband engages in a business other than that of investing,
reinvesting, owning, holding or trading in securities; (iii) Charter is not
an investment company; and (iv) Broadband is not an investment
company under Sections 3(a)(1)(A) or 3(a)(1)(B) of the Act, then
Broadband should be entitled to rely on Rule 3a-1 as the basis for the
conclusion that Broadband is not an investment company for purposes
of the Act. 83
The 1940 Act defines control as the “power to exercise a controlling influence over
the management or policies of a company”84 and provides a presumption that “[a]ny
person who owns beneficially, either directly or through one or more controlled
companies, more than 25[%] of the voting securities of a company shall be presumed
81
Id. at ¶ 41 (citing 15 USCS § 80a-3(b)(2)).
82
Id. at ¶ 40.
83
Id. at ¶ 44 (emphasis added).
84
Id. at ¶ 42 (citing 15 U.S.C. § 80a-2(a)(9)).
21
to control such company,” although such a presumption is rebuttable.85
Accordingly, Liberty Broadband continued to write in the same September 12 letter:
For the reasons discussed below, Liberty believes each of the foregoing
criteria has been met. . . . Under Section 2(a)(9) of the Act, a person
who owns beneficially, either directly or through one or more
controlled companies, more than 25% of the voting securities of a
company is presumed to control such company. Thus, by virtue of the
size of its ownership stake in Charter, Broadband will be presumed to
control Charter. Moreover, Broadband will “primarily” control
Charter because it will be the largest single stockholder of Charter. . . .
Second, through Charter, Broadband will engage in a business other
than that of investing, reinvesting, owning, holding or trading in
securities. Broadband will devote substantial time and resources to
overseeing Charter’s communications businesses, and will actively
participate in the governance of Charter. Under Liberty’s stockholders
agreement with Charter . . . Liberty has the right to designate four
persons for election to the Charter board of directors . . . . Pursuant to
the stockholders agreement, Charter has agreed to cause one of
Liberty’s designees to serve on each of the nominating and corporate
governance, audit and compensation and benefits committees of the
board, provided such persons meet the applicable independence and
other qualifications for membership on those committees. Currently,
directors designated by Liberty serve on each of those committees.86
In light of certain pending transactions with Comcast (discussed below), Liberty
Broadband also added that “[Liberty] Broadband believes that, based upon the facts
and circumstances anticipated to exist following conclusion of the Comcast
Transaction, it would continue to maintain ‘primary control’ of Charter.”87 Finally,
in its most recent 10-K filed before the Complaint, Liberty Broadband wrote that:
85
Id.
86
Id. at ¶ 44 (emphasis in Complaint).
87
Id. at ¶ 45 (emphasis in Complaint).
22
We do not believe we are currently subject to regulation under the
Investment Company Act of 1940, because our investment in Charter
enables us to exercise significant influence over Charter. We have
substantial involvement in the management and affairs of Charter,
including through our board nominees. Liberty [Media] nominated
four of Charter’s ten current directors, and we have assumed Liberty
[Media]’s nomination right under the terms of the [Original
Stockholders Agreement].88
3. The Comcast/TWC Transaction
Less than a month after the May 1, 2013 Original Liberty Transaction closed,
Liberty Media “began pushing Charter towards a major strategic transaction.”89
Throughout late 2013 and into early 2014, Charter and Comcast discussed the
possibility of a joint bid for TWC but these “negotiations broke down on February
4, 2014.”90 The next day, Malone called the lead TWC independent director and
expressed an “interest in pursuing an alternative, more collaborative path toward
combining TWC and Charter.”91 Assuming this call showed an attempt by Charter
to acquire TWC by itself; such an attempt met almost immediate failure. Less than
two weeks later, Comcast and TWC announced an agreement “for Comcast to
acquire TWC in an all-stock transaction valued at approximately $45 billion” (the
“Comcast/TWC Transaction”).92 Presciently anticipating a difficult path ahead with
88
Id. at ¶ 39 (emphasis in Complaint).
89
Id. at ¶ 63.
90
Id. at ¶ 64.
91
Id.
92
Id. at ¶ 65.
23
regulators, Comcast and TWC planned to divest subscribers.93 Accordingly, and
contingent upon the completion of the Comcast/TWC Transaction, “Charter entered
into a series of subscriber swaps with TWC and Comcast and a purchase agreement
for the acquisition of a Comcast spun off subsidiary” (the “Comcast Divestment
Transactions”).94
4. The Original Bright House Transaction
Thwarted in its acquisition of TWC, Charter looked for other opportunities
and found one in Bright House, owned by Advance/Newhouse.95 In April 2014,
Bright House sent Charter a list of “guiding principles” for any potential
combination between the two companies.96 Later in the month, the two companies
entered into a non-disclosure agreement for exchanging confidential information to
explore a potential combination.97 Advance/Newhouse sent Charter a high-level
term sheet on June 11, 2014 addressing their potential combination.98
Advance/Newhouse proposed that it would “contribute Bright House to a
partnership that would hold the combined company’s operations” in exchange for,
among other things, $1 billion in cash, convertible preferred units, common units
93
Id.
94
Id. at ¶ 66.
95
Id. at ¶ 68.
96
Yoch Aff. Ex. D (Charter Communications, Inc. Definitive Proxy Statement (Aug. 20 2015)
hereinafter the “Proxy”) at 137.
97
Id.
98
Compl. ¶ 91; Proxy at 137.
24
that would be exchangeable into Charter common stock, a number of board seats in
proportion to its equity ownership, and consent rights over major corporate
transactions.99 Charter then returned to Advance/Newhouse a revised term sheet, in
which it proposed limiting Advance/Newhouse’s influence over Charter
“particularly in conjunction with the existing share ownership and governance rights
of Liberty Media” pursuant to the Original Stockholders Agreement.100 The parties
continued to negotiate and exchange drafts of term sheets throughout the summer
and into the fall.101
By October, Advance/Newhouse and Charter, with the assistance of Charter’s
financial advisors Goldman Sachs and LionTree, had agreed to a non-binding term
sheet laying out the “material terms of the potential combination,” which they felt
was advanced enough to share with Liberty Media.102 On October 24, 2014, Liberty
Media returned a mark-up of the term sheet to Charter reflecting various changes.103
Liberty Media proposed that Advance/Newhouse “grant Liberty Media a proxy . . .
to vote as many [Advance/Newhouse] shares in Charter as would be required to
increase Liberty Media’s total voting stake in Charter to 25.01%.”104 Liberty Media
99
Proxy at 137.
100
Compl. ¶ 91.
101
See Proxy at 137–138.
102
Id.
103
Id. at 138.
104
Compl. ¶ 93; Proxy at 138. As a reminder, 25% is the threshold requirement for Liberty Media,
and, later, Liberty Broadband, presumptively to avoid regulation under the 1940 Act. See Compl.
¶ 42.
25
also proposed that “Charter grant Liberty Media preemptive rights to maintain its
pro rata ownership stake in Charter . . . in connection with any issuance of equity
securities of Charter.”105
In late October 2014, Charter’s Board of Directors met without the Liberty
Media Designees.
During the meeting, the directors . . . reviewed the potential conflicts of
interest of Goldman Sachs and [Charter’s legal advisor] Wachtell
Lipton, as well as the potential conflicts of interest of all directors
present at the meeting. The independent directors resolved to form a
working group comprising Eric L. Zinterhofer, Chairman of Charter,
John D. Markley Jr. and Lance Conn to meet as necessary to consider
and negotiate the potential transaction. Because LionTree advised the
Charter board of directors that they had a substantial historic and
ongoing relationship with Liberty, the independent directors of the
Charter board of directors negotiated and considered the transactions
with Liberty without the participation of LionTree.106
Throughout the next several weeks, Liberty Broadband and Charter, without the
presence of Advance/Newhouse, continued to negotiate the proposed governance
and other terms of a potential combination with Bright House.107 On November 11,
2014, during negotiations over Liberty Broadband’s preemptive rights, “Liberty
Broadband proposed to commit at the signing of the proposed combination to
purchase not less than $650 million of Charter Class A common stock at closing at
105
Proxy at 138–139.
106
Id. at 139.
107
Id. Liberty Broadband now held Liberty Media’s shares of Charter because of the Liberty
Broadband Spin. Id.
26
a price of $154.53 per share.”108 Towards the end of November, Liberty Broadband
and Charter “agreed to continue pursuing the potential combination with Bright
House” based on a revised non-binding term sheet that “provided for pre-emptive
rights enabling Liberty Broadband to maintain a 25.01% voting interest in Charter .
. . and for a 13-member board with three Liberty Broadband designees and three
[Advance/Newhouse] designees.”109
The parties continued to negotiate and on March 5, 2015, Charter’s Board met
and discussed the value of the equity-linked consideration Charter would provide
Advance/Newhouse as part of the potential combination.110 The Board discussed a
proposal to use “the 60-day volume weighted average price of Charter Class A
common stock” prior to signing and public announcement of the transaction and sent
Bright House a revised term sheet reflecting this price on March 11, 2015.111 This
term sheet also reflected that the reference price for Liberty Broadband’s purchase
of Charter common stock, now up from $650 to $700 million, would be based on
the same 60-day weighted average price (the “Reference Price”).112
On March 24, 2015, the Charter Board, without the Liberty Broadband
Designees, met and agreed to continue to pursue the combination with Bright House
108
Id.
109
Id.
110
Id. at 140.
111
Id.
112
Id. at 140–141.
27
“on substantially the terms proposed in the March 11, 2015 term sheet.”113 The full
Board met on March 30, 2015.114 “After a lengthy discussion of the benefits of the
proposed transaction,” the Liberty Broadband Designees voted in favor of the
proposed transaction and then they, along with LionTree, left the meeting.115 The
rest of the Board then reviewed the negotiations with Liberty Broadband and Bright
House. All of the directors present determined that the contemplated transactions
and agreements with Liberty Broadband and Bright House were “fair to and in the
best interests of Charter’s stockholders” and accordingly approved them.116
Charter officially announced its acquisition of Bright House on March 31,
2015 (the “Original Bright House Transaction”).117 Charter agreed to pay
Advance/Newhouse $2 billion in cash, and $5.9 billion of exchangeable common
partnership units and $2.5 billion of convertible preferred partnership units, both of
which were exchangeable into Charter common stock at the agreed-upon 60-day
volume weighted average Reference Price, which was calculated to be $173 per
share.118 Pursuant to a new stockholders agreement between Charter, Liberty
Broadband, and Advance/Newhouse that would become effective at closing,
Advance/Newhouse would retain a 26.3% ownership stake in the resulting
113
Id. at 141.
114
Id.
115
Id.
116
See id.
117
Compl. ¶ 69.
118
Id.
28
company’s outstanding common shares and Liberty Broadband would retain a
19.4% ownership stake.119 Advance/Newhouse also agreed to grant Liberty
Broadband a voting proxy on up to 6% of its shares, giving Liberty Broadband voting
power of at least 25.01% at closing.120 Both Advance/Newhouse and Liberty
Broadband would also be granted preemptive rights allowing them to maintain their
pro rata ownership.121 Liberty Broadband agreed to purchase $700 million of newly
issued Charter shares at the calculated Reference Price of $173 per share.122 Finally,
the resulting company’s board would consist of thirteen members, with
Advance/Newhouse and Liberty Broadband each designating three directors.123
The Original Bright House Transaction, however, “was contingent on the
completion of the Comcast Divestment Transactions.”124 The regulatory difficulties
faced by the Comcast/TWC Transaction proved insurmountable, and the
Comcast/TWC Transaction was terminated on April 24, 2015.125 Thus, the Comcast
Divestment Transactions and the Original Bright House Transaction became void.126
119
Id. at ¶ 70.
120
Id. (citing press release).
121
Id.
122
Id. The Proxy notes that Rutledge and Miron, CEO of Bright House, agreed to disregard the
effects of news reports about the potential combination on March 12, 2015 in calculating the
Reference Price. Proxy at 141.
123
Compl. ¶ 70.
124
Id. at ¶ 69.
125
Id. at ¶ 74.
126
See id.
29
5. The TWC Merger and the New Bright House Transaction
On the same day as the Comcast/TWC Transaction’s termination, Rutledge,
Charter’s CEO, spoke with Robert D. Marcus, previously the President and COO of
TWC and currently its Chairman and CEO,127 about a potential combination with
TWC.128 Rutledge also spoke with Maffei, CEO of Liberty Media, who expressed
support for Charter pursuing a combination with TWC.129 Maffei “noted Liberty
Broadband’s interest in making a significant additional investment in Charter,
including by exchanging its TWC shares for Charter shares . . . in light of Charter’s
potential financing needs and Liberty Broadband’s desire to maintain its percentage
equity interest in Charter.”130 Charter also began exploring debt-financing sources
for a potential combination with TWC.131
On May 4, 2015, Charter’s Board met and “considered the ability of Charter
to proceed with a TWC transaction either with or without consummation of the
Bright House transaction or further equity investment by Liberty Broadband.”132
The Charter Board authorized Charter’s management to make an offer for TWC for
an implied nominal value of approximately $172.50 per TWC share based on
127
Proxy at 136.
128
Id. at 143.
129
Id.
130
Id.
131
Id.
132
Id. at 144.
30
Charter’s stock price as of that day.133 The Charter Board also reaffirmed its
willingness to “complete the Bright House transaction on substantially the same
economic and governance terms as previously agreed.”134
a. The Liberty Share Issuances and Liberty Stock Consideration
On May 16, 2015, Charter and Liberty Broadband management, including
Maffei, discussed the “terms on which Liberty Broadband was interested in making
an additional investment in Charter shares to partially finance the cash portion of the
consideration to be paid to TWC stockholders and the terms on which Liberty
Broadband would consider exchanging TWC shares for Charter shares.”135 Liberty
Broadband also indicated that Liberty Interactive “might be interested in exchanging
its shares of TWC stock for shares of Charter stock on the same terms as Liberty
Broadband instead of receiving cash and stock consideration.”136 On May 17, 2015,
the independent directors of Charter’s board of directors met to receive
an update from Mr. Zinterhofer and Wachtell Lipton regarding the
Liberty Broadband investment, including the ongoing discussions
regarding the aggregate amount of the investment and the per share
price.137
Charter and Liberty Broadband eventually agreed that Liberty Broadband’s
additional investment of $4.3 billion would be “priced at a recent market price, on
133
Id.
134
Id.
135
Id.
136
Compl. ¶ 108; Proxy at 147.
137
Proxy at 147.
31
which the TWC transaction value was also based.”138 Charter and Liberty
Broadband also reached an agreement that Liberty Broadband’s other purchase of
newly issued common shares—the $700 million purchase initially agreed to in the
Original Bright House Transaction—would remain priced at the Reference Price of
$173 per share as previously agreed.139
b. The Charter Board Meets and Revises its Offer for TWC
On May 18, 2015, the Charter Board met and considered submitting a revised
offer for TWC.140 After discussion, the Charter Board authorized Charter
management to make a revised offer for TWC at an implied nominal value of $190
per share, which was “based on the then-prevailing 60-day volume-weighted
average price of Charter Class A common stock.”141 Negotiations continued, and on
May 21, 2015 the Charter Board again authorized a revised offer for TWC, this time
for an implied nominal value of $200 per share of TWC “based on the then-
prevailing 60-day volume-weighted average price of Charter Class A common
stock” or an implied nominal value of $195.71 per share of TWC “based on the
closing price of Charter stock on May 20, 2015.”142 Each TWC stockholder could
elect to receive “either $100 or $115 in cash, and either 0.5409 Charter shares per
138
Id. at 149.
139
Id.
140
Id. at 147.
141
Id. at 147–148.
142
Id. at 149.
32
TWC share or 0.4562 Charter shares per TWC share, respectively.”143 Upon making
this proposal, Marcus at TWC called Rutledge to inform him that TWC “was
authorized to proceed” on the basis of this latest proposal.144
c. The Charter Board Approves the TWC Merger, the New
Bright House Transaction, and the Related Liberty Transactions
Charter’s Board met for a final time on May 23, 2015 to consider the various
transactions.145 LionTree and Goldman each provided fairness opinions regarding
the merger with TWC focusing on the consideration paid by Charter to TWC
stockholders.146 LionTree and Goldman also each provided a fairness opinion for
the Bright House transaction.147 LionTree did not offer any opinion on the
transactions with Liberty,148 while Goldman took the $700 million share issuance to
Liberty “into account” in “calculating the fairness of the overall consideration paid
for Bright House,” but did not evaluate this issuance by itself.149 The Liberty
Broadband Designees voted unanimously in favor of the proposed transactions as
fair and in the best interests of Charter’s stockholders and then left the meeting along
with LionTree.150 The remaining directors then reviewed the negotiations over the
143
Id.
144
Id. at 150.
145
Id. at 151.
146
See Compl. ¶¶ 129–130.
147
Id. at ¶¶ 126–127.
148
Id. at ¶ 126.
149
See id. at ¶ 127 n.8; Proxy at 196.
150
Proxy at 152.
33
agreements with Liberty Broadband and Bright House.151 “After further
consideration and consultation with their advisors,” the remaining directors
unanimously determined that the merger agreement with TWC and the transactions
and agreements with Liberty Broadband and Bright House were fair to and in the
best interests of Charter’s stockholders and approved them accordingly.152
On May 26, 2015, Charter announced that it had reached an agreement to
merge with TWC (the “TWC Merger”) for a mixed consideration of stock and
cash.153 The TWC Merger valued TWC at approximately $78.7 billion,154 with
Charter expecting to assume approximately $22.6 billion of TWC debt.155 The
mixed stock and cash consideration would amount to approximately $29.3 billion
and $27.5 billion, respectively.156 More specifically, Charter agreed to provide
$100.00 in cash and shares equivalent to 0.5409 Charter shares for each outstanding
TWC share in a newly created public parent company—New Charter.157 Liberty
Broadband and Liberty Interactive would receive all stock (the “Liberty Stock
Consideration”) for their TWC shares.158 Charter also provided “an election option
151
Id.
152
Id.
153
Compl ¶ 75.
154
Id.
155
Proxy at Cover Letter to Charter Stockholders.
156
Id. I note that these numbers assume TWC stockholders selected the $100 cash option
(discussed below) and exclude minor cash and/or stock consideration to former TWC employees
and from replacement equity awards. See id.
157
Compl. ¶ 75.
158
Id.
34
for each [TWC] stockholder, other than [Liberty Broadband] or Liberty Interactive
. . . to receive $115.00 of cash and [New Charter] shares equivalent to 0.4562 shares”
of Charter for each TWC share.159 Upon the closing of the TWC Merger, Liberty
Broadband agreed to buy $4.3 billion of newly issued shares of New Charter at
$176.95, which was the closing price of Charter as of May 20, 2015 (the “$4.3
Billion Share Issuance”).160
At the same time that Charter announced the TWC Merger, it announced a
new Bright House Transaction with similar terms as the Original Bright House
Transaction (the “New Bright House Transaction”).161 Once again, pursuant to a
new stockholders agreement between Charter, Liberty Broadband, and
Advance/Newhouse, Advance/Newhouse agreed to grant Liberty Broadband a
voting proxy on up to 6% of its shares (the “Voting Proxy Agreement”). 162 Under
this same stockholders agreement, Liberty Broadband again agreed to purchase $700
million of newly issued Charter shares at the previously agreed to $173 per share
(the “$700 Million Share Issuance,” and collectively with the $4.3 Billion Share
Issuance, the “Liberty Share Issuances”).163 Liberty Broadband was also given the
159
Id.
160
See id. at ¶¶ 79, 81.
161
Id. at ¶ 77.
162
Id. at ¶ 83. There appears to be a discrepancy in the papers between whether the voting proxy
was capped at 6% or 7%, for purposes of this Memorandum Opinion, I have adopted 6%, which
is used more consistently in the briefing.
163
Id. at ¶ 79.
35
ability to “purchase from any issuance of equity in conjunction with capital raising
efforts sufficient shares to maintain its investment in the Company” and was carved
out from any future stockholders rights plan that Charter may adopt.164 The TWC
Merger and the New Bright House Transaction were conditioned on the Charter
stockholders approving the Liberty Share Issuances and the Voting Proxy
Agreement.165
d. The Stockholder Vote
On August 20, 2015, Charter filed a definitive proxy statement with the SEC
in connection with the TWC Merger and the agreements with Bright House and
Advance/Newhouse (the “Proxy”). The Proxy explains the requirements of Article
Eighth in Charter’s Certificate of Incorporation, namely, that the transactions must
be approved by a majority of unaffiliated outstanding shares of common stock
entitled to vote.166 During a special meeting on September 21, 2015, 90% of
outstanding Charter shares approved the TWC Merger.167 Excluding shares
beneficially owned by Liberty Broadband and its affiliates, approximately 86% of
outstanding Charter shares, in a single vote, voted in favor of the Liberty Share
164
Id. at ¶ 84.
165
See id. at ¶ 99.
166
See Proxy at 121.
167
Yoch Aff. Ex. F.
36
Issuances, the Liberty Stock Consideration, and the Voting Proxy Agreement.168
The TWC Merger and the New Bright House Transaction closed on May 18, 2016.
D. Before and After the Acquisitions
To recapitulate, before the Acquisitions, Charter, TWC, and Bright House
were separate entities. Bright House was wholly owned by Advance/Newhouse.
Liberty Broadband owned 26% of Charter. After the Acquisitions, Charter169 owned
Bright House and had merged with TWC. Charter’s ownership structure then
consisted of the following: TWC shareholders owned between approximately 40%
and 44%, Advance/Newhouse owned between approximately 13% and 14%, and
Liberty Broadband owned between approximately 19% and 20%.170 However,
pursuant to the Voting Proxy Agreement, Liberty Broadband retained an additional
voting interest of approximately 6%, keeping its total voting power about the same
as it stood before the Acquisitions.
E. Procedural History
One day after Charter filed the Proxy, the Plaintiff filed his original complaint
for breaches of fiduciary duties and alleged that the Proxy was materially incomplete
by its failure to disclose certain unlevered free cash flow projections (“UFCF”) and
168
Id.
169
Technically: New Charter.
170
See Compl. ¶ 80. At least, as of the time of the press release cited by the Complaint, this was
the expected resulting ownership structure.
37
the text of the Voting Proxy Agreement (the “Original Complaint”).171 The Plaintiff
filed a Motion to Expedite and moved for a preliminary injunction seeking to enjoin
the Acquisitions. Charter supplemented the Proxy on September 9, 2015, providing
the UFCF projections and the text of the Voting Proxy Agreement. The Plaintiff
then withdrew his Motion to Expedite and Motion for a Preliminary Injunction,
writing to the Court, “the parties have not agreed to any type of settlement or release
of any claims” but that “the additional disclosures did moot Plaintiff’s pending
motions.”172
After closing, the Plaintiff filed his Verified Amended Class Action
Complaint (the “Complaint”) on April 22, 2016 pleading four counts. Count I is an
individual and class claim for breach of fiduciary duty against the Director
Defendants. The Plaintiff alleges that the Director Defendants violated their duties
of care and loyalty by agreeing to the Liberty Share Issuances and the Voting Proxy
Agreement and failing to disclose all “material facts necessary for shareholders to
cast an informed vote on, amongst other things, whether to enter into the
Transactions and issue the shares contemplated thereunder.”173 According to the
Plaintiff, the Liberty Share Issuances and the Voting Proxy Agreement “will unfairly
expropriate and transfer voting and economic power from Charter’s public
171
Original Complaint ¶¶ 137–138 (Dkt. No. 1).
172
Pl’s Letter to the Court at 2 (Sept. 10, 2015) (Dkt. No. 12).
173
Compl. ¶¶ 157–159.
38
shareholders to” Malone and Liberty Broadband—the Stockholder Defendants.174
Count II is an individual and class claim for breach of fiduciary duty against the
Stockholder Defendants. The Plaintiff alleges that the Stockholder Defendants are
de facto controlling shareholders of Charter and thus owe the Plaintiff and the Class
fiduciary duties. According to the Plaintiff, the Stockholder Defendants violated
their fiduciary duties by “causing the Board to agree to the Liberty Share Issuances
and [the] Voting Proxy [Agreement].”175 Counts III and IV plead derivative claims
on behalf of Charter for breach of fiduciary duty against the Director Defendants and
the Stockholder Defendants for the same actions as Counts I and II—agreeing to, or
causing the Board to agree to, the Liberty Share Issuances and the Voting Proxy
Agreement.176
The Defendants moved to dismiss the Complaint on July 22, 2016 under Court
of Chancery Rule 12(b)(6) for failure to state a claim and Rule 23.1 for failing to
make a demand on the Board, which the Defendants argue should not be excused
here. I heard oral argument on Defendants’ Motions to Dismiss on November 15,
2016. In February 2017, the parties submitted supplemental letters in light of recent
decisions of this Court. My Memorandum Opinion on the Motions to Dismiss
follows.
174
Id. at ¶ 159.
175
Id. at ¶¶ 161–163.
176
Id. at ¶¶ 165–171.
39
II. ANALYSIS
The Complaint alleges claims on behalf of the Plaintiff, and derivatively on
behalf of Charter. The Defendants have moved to dismiss the Complaint pursuant
to Court of Chancery Rules 23.1 and 12(b)(6) for failure to state a claim. As is well-
settled, when examining a motion for failure to state a claim under Rule 12(b)(6),
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.177
However, the Court should accept “[o]nly true reasonable inferences,”178 rather than
“every strained interpretation of the allegations proposed by the plaintiff.” 179 Rule
23.1 vindicates director control of claims belonging to the corporation; where, as
here, no demand on the board is made, the Complaint must plead facts indicating
that the directors could not bring business judgment to bear on such a demand.180 I
first examine the Motions under Rule 12(b)(6).
The Plaintiff attempts to rebut the presumption under the business judgment
rule “that in making a business decision, the board of directors acted on an informed
basis, in good faith and in the honest belief that the action was taken in the best
177
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (internal quotations omitted).
178
Pfeffer v. Redstone, 965 A.2d 676, 683 (Del. 2009).
179
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
180
See Park Emps.' & Ret. Bd. Emps.’ Annuity & Benefit Fund of Chic. v. Smith, 2017 WL
1382597, at *4–5 (Del. Ch. Apr. 18, 2017).
40
interests of the company.”181 To do so, the Plaintiff argues that the Stockholder
Defendants controlled Charter.182 The Defendants counter that the Stockholder
Defendants were minority owners of Charter, and that the facts pled demonstrate
that those Defendants did not possess actual control of Charter, particularly in light
of the Amended Stockholders Agreement.183 Moreover, even if the Stockholder
Defendants controlled Charter, the Defendants argue that Kahn v. M & F Worldwide
Corporation184 (“MFW”) applies and cleanses the transaction.185 I do not need to
reach this latter issue, however. After reviewing the Complaint, and for the reasons
that follow, I find that the Plaintiff has failed to plead sufficient facts making it
reasonably conceivable that the Stockholder Defendants controlled Charter.
The Plaintiff also argues that the directors acted disloyally in entering into the
Liberty Share Issuances and Voting Proxy Agreement. The Defendants dispute this
claim, but argue that, regardless, any inequities in these transactions have been
cleansed by the ratifying vote of a majority of disinterested Charter stockholders
pursuant to the Corwin doctrine.186 Because I find it reasonably conceivable that,
181
Solomon v. Armstrong, 747 A.2d 1098, 1111 (Del. Ch. 1999) (internal quotations omitted).
182
Pl’s Answering Br. 2.
183
Charter Defs’ Opening Br. 24–25; Liberty Defs’ Opening Br. 16.
184
88 A.3d 635 (Del. 2014).
185
Charter Defs’ Opening Br. 42–43. See MFW, 88 A.3d at 644 (holding that “business judgment
is the standard of review that should govern mergers between a controlling stockholder and its
corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an
independent, adequately-empowered Special Committee that fulfills its duty of care; and the
uncoerced, informed vote of a majority of the minority stockholders”).
186
Charter Defs’ Opening Br. 38–39.
41
despite the absence of a controller, the vote of the stockholders here was structurally
coerced, ratification under Corwin is unavailable to the Defendants. Accordingly,
the business judgment rule is not imposed via ratification under Corwin, and I must
proceed to examine whether the Complaint withstands scrutiny under Rule 12(b)(6).
A. The Stockholder Vote Failed to Cleanse the Transaction
Under Corwin, business judgment review applies in an action challenging a
transaction that has been approved by a fully informed, uncoerced vote of the
disinterested stockholders.187 This is the case even if the transaction might otherwise
have been subject to entire fairness due to conflicts faced by individual directors.188
The result, absent an adequate pleading of waste, is dismissal.189 The rationale of
this line of cases is simple—where holders of a majority of stock vote to evince their
determination that the transaction is in corporate best interest, there is little utility in
a judicial second-guessing of that determination by the owners of the entity. The
doctrine depends on the Court’s ability to find that the stockholder vote represented
an informed determination that the challenged transaction was in the corporate
interest.
In that light, there are two limitations on the application of Corwin: the vote
must be fully informed, and be uncoerced. Both limitations aim at the same problem.
187
Corwin, 125 A.3d at 309.
188
Larkin v. Shah, 2016 WL 4485447, at *1 (Del. Ch. Aug. 25, 2016).
189
See Singh, 137 A.3d at 151–152.
42
The Court cannot assume from an uninformed vote that stockholders determined that
the transaction was beneficial, in light of the actual facts; thus, an uniformed vote
has no ratification effect. Likewise, a coerced vote offers no assurance that the
stockholders have made a determination that the transaction at issue is beneficial,
only that, under whatever coercive factors exist, they are better accepting the
transaction than the alternative. That is what “coercion” means in this context; that
facts extraneous to the challenged transaction may have driven the vote, and not a
determination by the stockholders that the transaction was in the corporate interest.
Thus, controller transactions are inherently coercive, and a transaction with a
controller cannot be ratified by a vote of the unaffiliated majority; the concern is that
fear of controller retribution in the face of a thwarted transaction may overbear a
determination of best corporate interest by the unaffiliated majority. In such a case,
the Court cannot determine that a vote ratifies the transaction on its own merits.
Likewise, ratification does not follow from a vote that is structurally coercive. Note
that this “coercion” need not imply any wrongdoing on the fiduciaries in the way
they have structured the vote;190 it simply means that the Court cannot assume that
the vote of the stockholders with respect to the challenged transaction was an
informed ratification of that transaction, because of the way the question upon which
190
See In re Saba Software, Inc. Stockholder Litig., 2017 WL 1201108, at *15 (Del. Ch. Mar. 31,
2017) (explaining that coercion does not turn on the intent of the fiduciaries, but on the effect on
stockholder voting).
43
they voted is constructed. For instance, a single vote to approve several unrelated
matters, in theory, could be coercive in this sense, if the Court could not conclude
that the vote represented an informed ratification of the challenged transaction on its
merits. That is all that I mean by “coercion” in this context.191
Here, a majority of the unaffiliated stock was voted, in a single vote, in favor
of the Issuances and the Voting Proxy Agreement. I must apply the analysis above
to determine whether this vote was an informed,192 uncoerced, ratification of those
transactions. I first find that these transactions did not involve a controller, and thus
that inherent coercion was not in play. I then turn to structural coercion. The
Director Defendants structured the vote on the Liberty Share Issuances and Voting
Proxy Agreement such that failure to approve those transactions would cause the
stockholders to lose the benefits of separate transactions, the Acquisitions. Because
I find, based on the applicable pleading-stage record and inferences, that the
Issuances and Voting Proxy Agreement were extraneous to the Acquisitions, but
receipt of the benefits of the Acquisitions was expressly conditioned on a positive
vote on the Issuances and Voting Proxy Agreement, no ratification occurred. I
cannot determine that the vote in favor of the Issuances and Voting Proxy Agreement
191
Coercion in this sense, “imposing an extrinsic incentive on the stockholder vote unrelated to
the transaction challenged,” is, no doubt, a peculiar use of the term, “coercion.” In true Dumptian
fashion, to “coerce” is used in different ways in our law, depending on the interests in consideration
and the result of a finding of coercion.
192
Because of my decision on coercion, I need not reach the Plaintiff’s argument that disclosure
deficiencies rendered the vote uninformed.
44
represented a determination by stockholders that those transactions were themselves
in the corporate interest.
1. The Stockholder Defendants are not Controlling Stockholders
As is well-established, a plaintiff can shift the standard of review from the
business judgment rule to entire fairness by either establishing the presence of a
controlling stockholder on both sides of a transaction or showing that “at least half
of the directors who approved the transaction were not disinterested or
independent.”193 An owner of a majority of stock, obviously, may control the board.
Here, however, the Stockholder Defendants controlled a minority block—about a
quarter—of the voting stock of Charter.
A stockholder who owns less than 50% of the voting power of a corporation
may still qualify as a controller—and owe the accompanying fiduciary duties—if he
“exercises control over the business affairs of the corporation.”194 To invoke entire
fairness, the Complaint must contain well-pled facts “demonstrating [the
stockholder’s] actual control with regard to the particular transaction that is being
challenged.”195 This actual control test is “not an easy one to satisfy” as
“stockholders with very potent clout have been deemed, in thoughtful decisions, to
193
In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980, 990 (Del. Ch. 2014).
194
See Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994) (internal quotations
omitted).
195
In re KKR, 101 A.3d at 991 (citations omitted); see In re Primedia Inc. Derivative Litig., 910
A.2d 248, 257 (Del. Ch. 2006) (“Allegations of control over the particular transaction at issue are
enough.”).
45
fall short of the mark.”196 Moreover, in order to establish actual control by
stockholders, and thus impose fiduciary duties on them, they must “have such
formidable voting and managerial power that they, as a practical matter, are no
differently situated than if they had majority voting control.”197
Otherwise, stockholders are not fiduciaries for the entities in which they own
stock. They are free to own, sell and vote their stock in their own self-interest. Such
independence is fundamental to the separation of ownership and control that makes
the corporate form a viable way to organize a business entity. Corporate fiduciaries,
on the other hand, are prohibited from considering their self-interest in making
corporate decisions. They must exercise their business judgment on behalf of the
entity and its stockholders, free from the taint of personal interest. Thus, it is only
where a stockholder assumes actual control over the decision-making process of the
entity, as where the stockholder has a majority interest and thus controls the board
of directors, or is otherwise able to overbear the business judgment of the directors,
that the law holds her to fiduciary standards. Again, a finding that a stockholder is
a controller has dramatic consequences—she is no longer able to act in self-interest,
but must act in the corporate interest only, and entire fairness applies to transactions
with the controller. The requirements for a sufficient pleading of controller status
196
See In re PNB Holding Co. Shareholders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18,
2006).
197
Id.
46
are appropriately rigorous, therefore; the complaint must plead facts that, if true,
imply actual control over the board of directors by the stockholder.
The Plaintiff argues the Stockholder Defendants controlled Charter due
Liberty Broadband’s 26% equity stake, its letters to the SEC allegedly admitting
control, and the Stockholder Defendants’ influence on the Charter Board.198 At first
glance, it would appear reasonably conceivable that the Stockholder Defendants
exercised actual control here. Upon further examination, however, and pursuant to
the stringent standard for control just described, I find that the contractual
restrictions levied on the Stockholder Defendants by the Amended Stockholders
Agreement and Charter’s Certificate of Incorporation are sufficient to overcome any
inference that Liberty Broadband was able to exercise actual control over Charter in
relation to the Liberty Share Issuances and Voting Proxy Agreement.
a. The Amended Stockholders Agreement
Pursuant to the Amended Stockholders Agreement, Liberty Broadband could
not acquire more than 35% of Charter stock,199 designate more than four out of ten
directors, or solicit proxies or consents.200 Additionally, for a broad range of
transactions, Charter’s Certificate of Incorporation requires, perhaps in an attempt
198
See Pl’s Answering Br. 2–3.
199
I note that this amount was set to increase to 39.99% after January 2016. See Compl. ¶ 35.
200
See id. at ¶¶ 33–35, 37.
47
to invoke MFW,201 approval by certain directors and a majority of unaffiliated
stockholders. These contractual restrictions inform my control analysis, and
ultimately play the primarily role in prohibiting a pleading stage inference of control
here.
b. The Stockholder Defendants Do Not Have a Controlling
Influence on the Board of Directors
The Plaintiff contends that the Stockholder Defendants controlled a majority
of the Board,202 or at least enough directors to veto any transaction, which, according
to the Plaintiff, is sufficient to establish control.203 The Complaint, however, does
not evince actual control over a majority of directors; the pleadings are limited to
showing that the directors share interests with the Stockholder Defendants, not that
the directors are subject to actual control. Similarly, in briefing the Plaintiff argues
that I should infer that the Stockholder Defendants—who hold a minority of the
voting power—are controllers, because, he alleges, a majority of the Board lacks
independence from the Stockholder Defendants.204 In other words, the Plaintiff
appears to be conflating a pleading that a majority of the Board lacked independence
from an interested party, with a pleading of actual control by that interested party.
However, it does not necessarily follow that an interested party also controls
201
88 A.3d 635 (Del. 2014).
202
Pl’s Answering Br. 21.
203
Id.
204
See id. at 21–39.
48
directors, simply because they lack independence. Lack of independence focuses on
the director, and whether she has a conflict in the exercise of her duty on behalf of
her corporation. Consideration of controller status focuses on the alleged controller,
and whether it effectively controls the board of directors so that it also controls
disposition of the interests of the unaffiliated stockholders: If yes, it is a fiduciary,
if no, it is simply a stockholder free to act in its own interests. A sufficient allegation
of control by a minority owner over the directors may imply controller status, but
the analysis must still turn on the power of the alleged controller to co-opt the
board.205
According to the Plaintiff, the Stockholder Defendants controlled Charter
because they allege a majority of the Charter Board was beholden to the Stockholder
Defendants due to, as laid out in painful detail in the Facts section of this
Memorandum Opinion, their influence over the directors’ employment or
investments.206 The Defendants do not contest the independence or disinterestedness
of Malone and Maffei.207 The Plaintiffs, on the other hand, do not challenge the
205
See Calesa Associates, L.P. v. American Capital, Ltd., 2016 WL 770251, at *10–11 (Del. Ch.
Feb. 29, 2016) (finding control of the board reasonably conceivable but explaining that one
director was a dual fiduciary and disclosures related to certain other directors stated their divergent
interests from that of the company’s stockholders and their affiliation with the alleged controller);
New Jersey Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *8–11 (Del. Ch.
Sept. 30, 2011) (finding it reasonably conceivable that one director controlled the board of
directors “through a pattern of threats” that could have intimidated them).
206
Pl’s Answering Br. 3.
207
Charter Opening Br. 31.
49
independence of Conn, Markley, and Merritt. Therefore, the independence of five,
out of ten, directors remains in dispute: Nair, Huseby, Zinterhofer, Jacobson, and
Rutledge. For Nair, Huseby, Zinterhofer, and Jacobson, Plaintiff’s allegations of
these directors lacking independence from the Stockholder Defendants revolve
around various alleged business connections and professional histories between each
director and Malone. The Plaintiff also adds that Nair and Huseby are Liberty
Broadband designees, which they admit is not dispositive. For Rutledge, the CEO
of Charter, the Plaintiff argues, “senior corporate officers generally lack
independence for purposes of evaluating matters that implicate the interests of a
controller;”208 obviously, this is unhelpful in establishing that Liberty Broadband
and its associates are controllers.
In other words, the Complaint alleges that some Director Defendants share
interests with the Stockholder Defendants. Whether or not this is a sufficient
pleading to imply lack of director independence, it is not sufficient, if true, to show
that Liberty Broadband and its associates exercised actual control over the Board.
The Plaintiff cites to In re Cysive, Inc., Shareholder Litigation209 and In re
Zhongpin Inc. Stockholders Litigation210 for the proposition that “a stockholder who
208
Pl’s Answering Br. 34 (citing In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016
WL 301245, at *35 (Del. Ch. Jan. 25, 2016)).
209
836 A.2d 531 (Del. Ch. 2003).
210
2014 WL 6735457, at *8 (Del. Ch. Nov. 26, 2014).
50
controls neither a majority of the stock nor a majority of the board can still be
controlling, given the inherent coercive power attendant to a large block holder who
controls a significant number of directors.”211 Additionally, the Plaintiff references
Cysive for the notion that contractual restrictions in stockholders agreements
“preventing a stockholder from directly designating a majority of the board” are
insufficient to prevent a finding of control.212
Cysive, I note, has been labeled by its author—Chief Justice Strine—as the
“most aggressive finding that a minority block holder was a controlling
stockholder.”213 In that case, then-Vice Chancellor Strine found that a 40%
stockholder (approximately 35% when excluding beneficially owned options), who
was the company’s founder, chairman, and CEO; whose family members held two
executive positions; and who, together with his subordinate and family members,
formed a unified voting coalition, was a controller.214 Then-Vice Chancellor Strine
focused on the alleged controller’s “managerial control” and “voting power” which
“position[ed] him well to elect a new slate more to his liking without having to attract
much, if any, support from public stockholders.”215 Also of note, the alleged
controller in Cysive was “involved in all aspects of the company’s business, was the
211
Pl’s Answering Br. 22.
212
Id. (citing Cysive, 836 A.2d at 551).
213
In re Morton's Rest. Grp., Inc. Shareholders Litig., 74 A.3d 656, 664–66 (Del. Ch. 2013).
214
Cysive, 836 A.2d at 551–553.
215
Id. at 552.
51
company’s creator, and ha[d] been its inspirational force.”216 Similarly, the Court in
Zhongpin found it reasonably conceivable that the founder, chairman, and CEO who
beneficially owned 17.3% of the company was a controller because he “could
exercise significant influence over shareholder approvals for the election of
directors, mergers and acquisitions,” and bylaw amendments and “possessed active
control over” day-to-day operations.217
Here, however, the alleged influence of the Stockholder Defendants over the
Charter Board, while relevant to the issue of whether a majority of the board is
disinterested or lacks independence, does not rise to the level of actual control
similar to that found in Cysive or Zhongpin. As discussed, the particularities of the
Amended Stockholders Agreement here prevented Liberty Broadband from
designating a majority of Board seats and from soliciting proxies, distinguishing its
position from the stockholder in Cysive who was well-positioned “to elect a new
slate more to his liking.”218 The Amended Stockholders Agreement also limited
Liberty Broadband from potentially accumulating more than 35% of the stockholder
vote, which would be below the percentage actually, rather than just potentially,
beneficially owned by the alleged controller in Cysive. Finally, Charter’s Certificate
of Incorporation required approval of transactions such as those at issue by certain
216
Id.
217
In re Zhongpin, 2014 WL 6735457, at *7–8.
218
Cysive, 836 A.2d at 552.
52
directors and unaffiliated stockholders. A bevy of contractual restrictions
constrained Liberty Broadband from control of Charter; no such restrictions were
present in Cysive, or Zhongpin, and I therefore find those cases inapposite to this
matter.
c. SEC Filings
Of most concern to me here is Liberty Broadband’s letters to the SEC, which
I have reproduced again in full below.219
For the reasons discussed below, Liberty believes each of the foregoing
criteria has been met. . . . Under Section 2(a)(9) of the Act, a person
who owns beneficially, either directly or through one or more
controlled companies, more than 25% of the voting securities of a
company is presumed to control such company. Thus, by virtue of the
size of its ownership stake in Charter, Broadband will be presumed to
control Charter. Moreover, Broadband will “primarily” control
Charter because it will be the largest single stockholder of Charter. . . .
Second, through Charter, Broadband will engage in a business other
than that of investing, reinvesting, owning, holding or trading in
securities. Broadband will devote substantial time and resources to
overseeing Charter’s communications businesses, and will actively
participate in the governance of Charter. Under Liberty’s stockholders
agreement with Charter . . . Liberty has the right to designate four
persons for election to the Charter board of directors . . . . Pursuant to
the stockholders agreement, Charter has agreed to cause one of
Liberty’s designees to serve on each of the nominating and corporate
governance, audit and compensation and benefits committees of the
board, provided such persons meet the applicable independence and
other qualifications for membership on those committees. Currently,
directors designated by Liberty serve on each of those committees.220
219
I refer the interested reader to the Facts section for better context. See supra notes 79–88 and
accompanying text.
220
Compl. ¶ 44 (emphasis in Complaint).
53
[Liberty] Broadband believes that, based upon the facts and
circumstances anticipated to exist following conclusion of the Comcast
Transaction, it would continue to maintain ‘primary control’ of
Charter.221
[Liberty Broadband] do[es] not believe we are currently subject to
regulation under the Investment Company Act of 1940, because our
investment in Charter enables us to exercise significant influence over
Charter. We have substantial involvement in the management and
affairs of Charter, including through our board nominees. Liberty
[Media] nominated four of Charter’s ten current directors, and we
have assumed Liberty [Media]’s nomination right under the terms of
the [Original Stockholders Agreement].222
The Plaintiff again cites to Zhongpin, this time for the notion that the Court found a
17% stockholder to be a controller where the company’s 10-K stated the stockholder
had significant influence over management and described the stockholder as a
controlling stockholder.223 Similarly, the Plaintiff references In re Loral Space &
Communications, Inc.224 for the proposition that stockholders have been found to be
controlling where the stockholder and company publicly maintained outside the
litigation that the stockholder controlled the company. 225 This case is
distinguishable, however; in In re Loral, the controlling stockholder also seated a
majority of directors of the company.226 Also, as previously discussed, the controller
in Zhongpin had significant influence over elections and active control of day-to-day
221
Id. at ¶ 45 (emphasis in Complaint).
222
Id. at ¶ 39 (emphasis in Complaint).
223
Pl’s Answering Br. 19.
224
2008 WL 4293781 (Del. Ch. Sept. 19, 2008).
225
Id. (citing In re Loral, 2008 WL 4293781, at *21).
226
In re Loral, 2008 WL 4293781, at *21.
54
operations. 227 In other words, the public declarations of control in both these cases
were not the only considerations by which the Court determined those defendants
exercised control.
I find, despite these initially-persuasive statements to the SEC, and in light of
my discussion above regarding Plaintiff’s other allegations of control, the
contractual handcuffs binding the Defendants here prevent me from finding it
reasonably conceivable that the Stockholder Defendants were capable of exercising
actual control over Charter. Without the contractual restrictions of the Amended
Stockholders Agreement and the Certificate of Incorporation, it seems to me that
Liberty Broadband’s statements to the SEC would likely be sufficient to establish,
at the pleading stage, that the Stockholder Defendants were controllers. In other
words, absent contractual restrictions as exist here, it would seem to me reasonably
conceivable that a company that tells the SEC it exercises “primary control” and has
a “significant influence” over another company is a controller of that company,
regardless of the fact that the statements were made in a different context in which
they were self-serving. Here, however, as is common throughout the entire analysis
of control in this matter, the restrictions in the Certificate of Incorporation and the
Amended Stockholders Agreement prevent such a finding. Despite the SEC
227
In re Zhongpin Inc., 2014 WL 6735457, at *7–8.
55
disclosures, in other words, the Stockholder Defendants were not in a position to
exercise actual control over the directors.
In light of the foregoing, I do not find it reasonably conceivable, upon the facts
pled, that the Stockholder Defendants were controlling fiduciaries of Charter with
respect to the transactions at issue. Accordingly, I need not conduct a MFW analysis
and, for purposes of Corwin, no coercion exists from the presence of a controller.
As discussed below, however, the vote here was structured in such a way to make it
reasonably conceivable that the stockholder vote was coerced.
2. The Stockholder Vote was Structurally Coerced
Corwin and its progeny exist primarily to “avoid the uncertainties and costs
of judicial second-guessing when the disinterested stockholders have had the free
and informed chance to decide on the economic merits of a transaction for
themselves.”228 Our Supreme Court has explained further that
[w]hen the real parties in interest—the disinterested equity owners—
can easily protect themselves at the ballot box by simply voting no, the
utility of a litigation-intrusive standard of review promises more costs
to stockholders in the form of litigation rents and inhibitions on risk-
taking than it promises in terms of benefits to them.229
228
Corwin, 125 A.3d at 313. See also In re Massey Energy Co. Derivative & Class Action Litig.,
2017 WL 1739201, at *19 (Del. Ch. May 4, 2017) (discussing the “fundamental policy underlying
Corwin”).
229
Corwin, 125 A.3d at 313 (emphasis added).
56
Chancellor Bouchard recently cautioned, however, that the policy underlying
Corwin “was never intended to serve as a massive eraser, exonerating corporate
fiduciaries for any and all of their actions or inactions preceding their decision to
undertake a transaction for which stockholder approval is obtained.”230 In that
regard and for the reasons explained below, despite the lack of a controller here I
find that the Plaintiff has pled facts making it reasonably conceivable that the vote
of the disinterested stockholders in this matter was structurally coerced.
Accordingly, such a vote fails to cleanse the transactions here under Corwin.
Coercion is a context-driven term. The term itself “is not very meaningful.”231
Its ordinary definition, “something akin to intentionally persuading someone to
prefer one option over another,” is different from saying such persuasion “would so
impair the person's ability to choose as to be legally actionable.”232
For the word to have much meaning for purposes of legal analysis, it is
necessary in each case that a normative judgment be attached to the
concept (‘inappropriately coercive’ or ‘wrongfully coercive’, etc.).
But, it is then readily seen that what is legally relevant is not the
conclusory term ‘coercion’ itself but rather the norm that leads to the
adverb modifying it.233
230
In re Massey, 2017 WL 1739201, at *20.
231
Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986).
232
Gradient OC Master, Ltd. v. NBC Universal, Inc., 930 A.2d 104, 117 (Del. Ch. 2007) (internal
citations omitted).
233
Katz, 508 A.2d at 880 (emphasis added).
57
I have attempted to define structural coercion, in the ratification context, above. It
does not necessarily implicate director wrongdoing in the structuring of a vote, and
such structuring, in any event, is not the focus of liability here. In the Corwin
context, a structurally-coerced vote is simply a vote structured so that considerations
extraneous to the transaction likely influenced the stockholder-voters, so that I
cannot determine that the vote represents a stockholder decision that the challenged
transaction is in the corporate interest.234 If I cannot make such a determination, no
ratification has occurred, and any inherent breaches of duty regarding the transaction
are uncleansed. In such a case, I must do a traditional analysis of the transaction
regardless of the stockholder vote, and determine whether business judgment or
entire fairness is the applicable standard of review.
This, I note, is not a license for plaintiffs to pick apart factors in stockholder
votes to nullify ratification. If a transaction is negotiated and structured in a
particular way, and presented to the stockholders such that they may ratify it, or
reject it and retain the status quo, such a vote is not structurally coercive.235 Breaches
of duty inherent in that transaction—failure to run an informed sales process, say, or
negotiation by self-interested fiduciaries—are not themselves separate
234
Williams v. Geier, 671 A.2d 1368, 1382 (Del. 1996) (citing Eisenberg v. Chicago Milwaukee
Corp., 537 A.2d 1051, 1061 (Del. Ch. 1987)).
235
See In re Gen. Motors Class H Shareholders Litig., 734 A.2d 611, 621 (Del. Ch. 1999)
(explaining that the voting stockholders “had a free choice between maintaining their current status
and taking advantage of the new status offered by the [transactions]”).
58
“transactions” imbedded in the vote that render it coercive. Likewise, the mere fact
that a transaction is “economically too good to resist” is not enough to render an
otherwise valid stockholder vote structurally coercive.236 Rather, Courts will defer
to a board’s decision to structure a deal unless the decision “strong-arms” the
stockholders into voting for the transaction “for reasons outside of the economic
merit” of the decision.237 Our case law, therefore, draws a distinction between
potential breaches of duty inherent in the transaction, which are cleansed by a
ratifying vote, and extrinsic “strong-arming.”
The question here is whether the Director Defendants structured the
transactions and votes in such a way that the Liberty Share Issuances and the Voting
Proxy Agreement have been ratified. In order for a cleansing ratification to inhere
in a stockholder vote, the board must have structured the vote in a way that gives
stockholders the “free choice between maintaining their current status and taking
advantage of the new status offered by” the transaction.238 In other words, when
examining whether a vote was structurally coerced, I must consider “whether the
stockholders have been permitted to exercise their franchise free of undue external
pressure created by the fiduciary that distracts them from the merits of the decision
236
Ivanhoe Partners v. Newmont Min. Corp., 533 A.2d 585, 605 (Del. Ch. 1987) (internal
quotations omitted).
237
Gradient, 930 A.2d at 119 (discussing In re Gen. Motors, 734 A.2d at 620–21).
238
In re Gen. Motors, 734 A.2d at 621.
59
under consideration.”239 Ultimately, I may not find cleansing ratification if the facts
pled indicate that the vote was not an informed stockholder approval of the
transaction at issue, as itself in the interest of Charter.
Here, the Board presented the Charter stockholders with multiple proposals
on which to vote. One proposal concerned the TWC Merger, which 90% of
outstanding Charter shares voted to approve.240 All parties here agree that that
transaction, and the New Bright House Transaction, were value-enhancing to
stockholders. Another proposal addressed the Liberty Share Issuances and the
Voting Proxy Agreement, which 86% of stockholders unaffiliated with Liberty
Broadband voted to approve.241 Concerning both of these proposals, the Proxy
disclosed to the Charter stockholders:
In order to satisfy the conditions to the completion of the mergers,
Charter and TWC stockholders must vote to approve the adoption of
the merger agreement and Charter stockholders must vote to approve
the stock issuances in connection with the transactions contemplated by
the merger agreement, the Liberty investment agreement and the
BHN/Liberty stockholders agreement, the Liberty transactions and the
amended and restated certificate of incorporation, as described in this
joint proxy statement/prospectus.
In order to satisfy the conditions to the completion of the BHN
transactions, Charter stockholders must vote to approve the stock
issuances in connection with the transactions contemplated by the
BHN/Liberty stockholders agreement and the BHN contribution
239
In re Saba, 2017 WL 1201108, at *15 (citing Williams, 671 A.2d at 1382–83; Gradient, 930
A.2d at 117–121).
240
See Yoch Aff. Ex. F.
241
See id.
60
agreement, certain Liberty transactions (including the provisions of the
BHN/Liberty stockholders agreement) and the amended and restated
certificate of incorporation, as described in this joint proxy
statement/prospectus.242
In other words, in order to receive the benefit that the Director Defendants had
obtained by negotiating the Acquisitions, Charter stockholders had to vote for a
transaction allegedly transferring wealth from Charter to Liberty Broadband, and
approve an alleged concentration of voting power in Liberty Broadband. Charter
stockholders could vote against these allegedly-inequitable transfers to Liberty
Broadband, but they would have to give up the value the directors had achieved via
the Acquisitions.
I assume, for purposes of this ratification analysis only, that fiduciary duty
violations inhered in the Liberty Share Issuances and the Voting Proxy Agreement.
The Board, in that case, presented the stockholders with a simple choice: accept
(disloyal) equity issuances to the Company’s largest stockholder, and an agreement
granting that stockholder greater voting power, or lose two beneficial transactions.
In other words, the stockholders were told that if they refused to approve certain
transactions, themselves potentially not in the corporate interest, they would lose out
on other, beneficial, transactions.
242
Compl. ¶ 99; Proxy at 5. I note that the Voting Proxy Agreement and the $700 Million Share
Issuance was contained in the “BHN/Liberty stockholders agreement” referenced by the Proxy
here. See Proxy at 28–29. The $4.3 Billion Share Issuance was contained in the “Liberty
investment agreement.” See Proxy at 29.
61
Accordingly, the Charter stockholders, it seems to me, were not able to “easily
protect themselves at the ballot box by simply voting no.”243 If they voted one way,
they would forgo two lucrative deals. If they voted another way, they would transfer
value to an insider (and, should Corwin apply, release a potentially valuable
fiduciary duty claim).
The Defendants rely on In re General Motors Class H Shareholders
Litigation244 for the proposition that a vote is only coercive “when stockholders are
‘put to a choice between a new position and a compromised position,’ not when they
are given ‘a free choice between maintaining their current status and taking
advantage of the new status’ offered by the transaction on which they are voting.’”245
According to the Defendants, the stockholders had such a free choice here—accept
or reject the aggregate transactions in toto. In General Motors, the board of directors
told stockholders that voting to approve the transactions in that case—essentially a
recapitalization—would require that the stockholders waive certain charter
provisions granting the stockholders certain rights in the event of a
recapitalization.246 The stockholders were also told that a similar transaction in the
future would be subject to more burdensome tax consequences because of recent
243
Corwin, 125 A.3d at 313 (emphasis added).
244
734 A.2d 611 (Del. Ch. 1999).
245
Charter Defs’ Reply Br. 22–23 (quoting In re Gen. Motors, 734 A.2d at 621).
246
In re Gen. Motors, 734 A.2d at 614–615.
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legislation.247 Then-Vice Chancellor Strine held that structuring the vote in such a
way was not coercive, because all that the stockholders “were asked to do [was] to
accept a new status or remain in their current status,” explaining that “[r]esponsible
investors must be prepared to make such choices.”248 The Court noted that the
Plaintiffs’ allegations did not state “a claim that the coercive actions were ‘unrelated
to the merits’” of the transactions at issue.249 The applicability of the General
Motors rationale here depends on the latter consideration; were the Issuances (and
the Voting Proxy Agreement) an integral part of the overarching Acquisition
transactions, or do the pleadings make it reasonably conceivable that the Issuances
and Voting Proxy Agreement were extrinsic, and tacked to the Acquisitions to
strong-arm a favorable vote? At the pleading stage, I find the latter.
It is a truism that every deal involves a compromise of sorts. Thus, a party to
a deal always gives something up; it must always weigh the costs and benefits of the
proposed transaction. If a deal is completed, it is because each party has decided
that, on net, the deal is subjectively beneficial. The recapitalization in General
Motors was just such a deal: the stockholders forwent certain economic rights in
order to obtain a greater economic benefit. The stockholders here, however, did not
simply offer up some economic right belonging to them in order to obtain the net
247
Id. at 620.
248
Id. at 621.
249
Gradient, 930 A.2d at 118 (quoting In re Gen. Motors, 734 A.2d at 620).
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benefit of the TWC Merger and the New Bright House Transaction. Rather, the
Charter stockholders were confronted with accepting an allegedly tainted transaction
in order to obtain two larger beneficial transactions. Because I find it reasonably
conceivable that the vote on the challenged transactions was “unrelated to the
merits” of the Acquisitions, but structured in such a way make receipt of the benefits
of the Acquisitions contingent of that vote, the rationale of General Motors in
inapplicable here.
In the classic Corwin case, fiduciaries ask stockholders via their votes to ratify
an intrinsic element of the deal process, such as the alleged lack of independence of
a majority of the directors. There, courts generally will defer to the stockholder
franchise on process matters inherent in a deal that stockholders deem valuable. The
Defendants refer to the Issuances as “financing” for the Acquisitions, but in reality,
the equity sale to Liberty Broadband formed an insignificant part of the
consideration for the Acquisitions. Is such financing an inherent part of the
transaction? I find the pleadings sufficient to make it reasonably conceivable that
the insider financing was not integral to, but was extrinsic to, the Acquisitions.250
The Plaintiff alleges that Charter “easily could have proceeded with either just
the TWC Transaction or with the TWC Transaction and a transaction to acquire
250
See Compl. ¶ 77.
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Bright House without improperly benefiting Liberty Broadband.”251 To that point,
I note that the record does not disclose that the Defendant Directors made a
determination that the Issuances and the Voting Proxy Agreement were necessary to
the Acquisitions. I also find nothing in the Proxy informing stockholders that this
financing was in the corporate interest, independent of the Acquisitions. In fact, the
fairness opinions offered to the Board and the stockholders failed to address the
fairness of the Liberty Share Issuances (and the Voting Proxy Agreement), standing
alone.252 The Defendants also point to nothing in the pleadings and documents
incorporated therein that indicates that the Director Defendants attempted to obtain
the small part of the deal financing provided by Liberty Broadband, by instead
issuing equity to a non-insider.253 Rather, the Proxy discloses that Liberty
Broadband initially proposed the Liberty Share Issuances and from then on, it seems
to me, implies that the Issuances were a “done deal,” more-or-less.254 More
specifically, for the $4.3 Billion Share Issuance, the Proxy states “Mr. Maffei [of
Liberty Broadband] also noted Liberty Broadband’s interest in making a significant
251
Id.
252
See id. at ¶¶ 126, 127 n.8, 129, 131; Proxy at 196, H-5, J-4.
253
To the extent I am improperly characterizing the $700 Million Share Issuance as financing for
the New Bright House Transaction, any other plausible beneficial purpose to Charter stockholders
for its execution eludes me.
254
See Proxy at 139 (“Liberty Broadband proposed to commit at the [Bright House] signing . . .
not less than $650 million of Charter Class A Common Stock.”); id. at 143 (stating with regards
to the TWC Merger that “Mr. Maffei [of Liberty Broadband] also noted Liberty Broadband’s
interest in making a significant additional investment in Charter.”).
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additional investment in Charter . . . in light of Charter’s potential financing needs
and Liberty Broadband’s desire to maintain its percentage equity interest in
Charter.”255 Then, without further explanation, discussion of the TWC Merger in
the Proxy appears to continue under the assumption that the TWC Merger would be
financed (in small part) by an additional equity investment by Liberty Broadband.256
Moreover, the Defendants cite to nothing in the pleadings and incorporated
documents that indicates the Liberty Share Issuances were the only method of
financing available for the approximately $5 billion obtained through their
execution. To the contrary, the Proxy briefly mentions the Board’s exploration of
debt financing, that Charter “expect[ed] to finance part of the consideration for the
[Acquisitions] with additional indebtedness of approximately $24 billion” and that
Charter had “committed financing for approximately $4.3 billion of additional
indebtedness.”257 In other words, in a deal that valued TWC at $78.7 billion and
involved stock consideration of approximately $29.3 billion, cash consideration of
approximately $27.5 billion, and Charter taking on additional indebtedness of $24
255
Id. at 143 (emphasis added).
256
See Compl. ¶ 108 (“Without any further discussion, Charter executives appear to have assumed
that the TWC Transaction would be financed, in part, by a further share purchase by Liberty
Broadband.”). The Proxy only pauses later to note that members of Charter management had a
call with Liberty Broadband management “to discuss the potential terms on which Liberty
Broadband was interested in making an additional investment in Charter to partially finance the
cash portion of the consideration to be paid to the TWC stockholders.” See Proxy at 147.
257
See Proxy at 143, 222.
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billion to finance part of that consideration,258 the Proxy does not disclose to the
stockholders the reason the relatively insignificant $4.3 billion in financing from the
Liberty Share Issuance was an integral part of the transaction. At this pleading stage,
I remain unconvinced that this particular form of financing via an equity issuance to
the Company’s largest stockholder was necessary to, or inherently a part of, the
overall deal.259
Accordingly, one reasonable inference from the facts pled in the Complaint
(although not the only one) is that the Defendants obtained the Acquisitions, and
then used the value of those transactions to obtain a favorable vote on extrinsic
transactions—the Liberty Share Issuances and the Voting Proxy Agreement,
transactions that allegedly transferred wealth and voting power to Liberty Broadband
at stockholder expense. If so, this was structurally coercive, and no ratifying
cleansing resulted therefrom. I cannot find from the vote itself that the independent
258
Compl. ¶ 75; Proxy at Cover Letter to Stockholders. I note that the expected aggregate equity
value of the TWC Merger to the TWC stockholders was approximately $57.5 billion, assuming
TWC stockholders took the $100 cash option. See Proxy at Cover Letter to Stockholders.
259
I also note that it appears from the Proxy that the TWC Merger was not subject to any “financing
out” condition. See Proxy at 160 (listing “the absence of financing conditions or other limitations
on recourse if Charter is unable to obtain financing from its debt financing sources or if the Liberty
transactions are not consummated” as a “countervailing factor” considered by the Board in its
deliberations on the TWC Merger.) If so, I find it curious that the Director Defendants conditioned
the stockholders’ receipt of the TWC Merger on the stockholders’ approval of the approximately
$5 billion in financing from the Liberty Share Issuances, but failed to negotiate for a financing
condition in the actual merger agreement itself.
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stockholders made a determination that the Issuances and Voting Proxy were in the
interests of Charter.
Before turning from this analysis, it is appropriate to note that all I have
determined here is that the vote in favor of the Issuances and Voting Proxy does not
cleanse breaches of duty, if any, inherent in those transactions; and not that the
Complaint has stated a claim that such wrongdoing in fact exists. I now turn to that
analysis.
B. The Nature of the Claims
Having found that, on the current pleadings, the Defendants are not entitled to
a dismissal under the Corwin doctrine, I must turn to the substance of the Motions
to Dismiss. The Plaintiff brings his claims, allegedly, both for himself and
derivatively on behalf of Charter. The Defendants moved to dismiss these claims
under Court of Chancery Rules 12(b)(6) and 23.1. Perhaps because of the parties’
focus on dismissal under MFW and Corwin, they gave scant attention in briefing as
to whether the claims here are in fact direct or derivative.260 Such a determination
will have a substantial effect here, of course. If the claims are direct, the Plaintiff
must plead only facts that disclose a reasonable conceivability of liability in order to
surmount the Motion to Dismiss; he faces the steeper climb to show that the Board
260
See generally El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016)
(explaining direct, derivative, and “dual-natured” claims).
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could not bring its business judgment to bear on the demand he forwent, before he
may proceed derivatively consonant with Rule 23.1. I consider the briefing
insufficient for me to proceed efficiently on an analysis of the nature of the Plaintiff’s
claims. Therefore, I reserve decision on the Motions to Dismiss. The parties should
confer and provide a stipulated supplemental briefing schedule on this issue.
III. CONCLUSION
For the reasons stated above, I reserve on the Defendants’ Motions to Dismiss,
pending supplemental briefing.
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