Sciabacucchi v. Liberty Broadband Corporation (Del. Ch. 2017) involved Charter Communications, Inc.’s (“Charter” or the “Company”) acquisition of Bright House Networks, LLC (“Bright House”) and the merger with Time Warner Cable (“TWC”). One of the complained of matters in the transaction was Charter’s issuance of equity to an insider, the largest stockholder of Charter, defendant Liberty Broadband Corporation. The issuance was purportedly to finance the acquisitions in part. The Liberty share issuances 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.
The Defendants argued that the vote of the majority of unaffiliated stock in favor of the Liberty share issuances cleansed any breach of duty complained of, under the rationale of Corwin v. KKR Financial Holdings LLC. 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.
The stockholders were advised that the acquisitions of Bright House and TWC were expressly conditioned on stockholder approval of the Liberty share issuances on the terms presented. In other words, to get the clear benefit of the acquisitions of Bright House and TWC, the stockholders had to approve the Liberty share issuances.
The Court of Chancery noted 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. According to the Court, 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.
In this case however, the board did not determine that the acquisitions could be consummated only via the Liberty share issuances. The directors did not seek or receive a fairness opinion that the Liberty share issuances, standing alone, were fair to the Company or the stockholders.
The Court held Plaintiffs had pled facts making it reasonably conceivable that the vote was structurally coercive. Those facts, and related favorable inferences, 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 other matters. Assuming that viable breaches of fiduciary duty inhere in the Liberty share issuances, they could not 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. The Court stated 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.
Note that the Court reserved further judgement on this matter pending briefing on whether the claims asserted were derivative or direct. It also noted it did not make any findings that any wrongdoing occurred.
