In re Cellular Telephone P’ship Litig., Coordinated C.A. No. 6885-VCL (Del. Ch. Mar. 9, 2022)
A controller that stands on both sides of a freeze-out transaction has the burden to prove that its acquisition was entirely fair to minority partners in terms of the acquisition’s process and price. The freeze-out of minority partners at an opportune time for the controller may not satisfy entire fairness review.
AT&T Mobility Wireless Operations Holdings LLC (“AT&T”) owned more than a 98 percent interest in a partnership that held the license to provide cellular telephone services in a geographic area near Salem, Oregon. AT&T controlled the partnership and anticipated an explosion in growth as the demand for wireless services surged. AT&T proposed a freeze-out transaction that it characterized as an effort to save on administrative costs and simplify corporate structure. Its proposal to the minority partners involved a valuation developed by a financial expert who had a long history of working with AT&T and who deferred to AT&T to adjust his calculations. AT&T’s proposal included a five percent premium over its expert’s valuation if the minority partners accepted the proposal.
The Court held that the controller freeze-out transaction failed to meet both prongs of the entire fairness test—fair process and fair price. Here, there was no special committee, bargaining, or majority of the minority vote requirement for the acquisition. AT&T hid its strong internal projections and provided misleading answers to questions about valuation and the expert’s history with AT&T. The Court closely examined AT&T’s valuation methodologies and pointed out departures from the valuation used during the acquisition. The Court noted that AT&T’s model failed to factor in the minority partners’ contractual rights to premiums on revenue and discounts on cost, failed to align with AT&T’s contemporaneous beliefs about value, and contained inputs with critical errors and outdated metrics. The Court expressed concern with a perpetuity growth rate lower than inflation and the use of a corporate tax rate for a pass-through entity. Proposed comparable companies were not sufficiently reliable given the nature of the partnership in comparison to integrated telecommunications companies, and proposed comparable transactions were not reliable given that none involved a discrete entity whose asset was spectrum.
The Court awarded the plaintiffs damages equal to the difference between the consideration they received and a pro-rata share of the fair value of the partnership as determined by the Court. To calculate fair value at the time of the freeze-out, the Court used a discounted cash flow model that corrected for errors in AT&T’s expert’s model. The Court assumed no entity-level tax given the operative reality of the partnership and added a size premium because of local risks to the partnership even though it was part of a national entity.
