On May 31, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss purported derivative and direct stockholder claims for breaches of fiduciary duty against the directors of Charter Communications, Inc. (“Charter”) regarding share issuances to, and a voting proxy agreement with, its largest stockholder, Liberty Broadband Corporation (“Liberty”), in connection with Charter’s recent acquisition of Bright House Networks, LLC (“Bright House”) and merger with Time Warner Cable (“TWC”) (the “Acquisitions”). Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418-VCG (Del. Ch. May 31, 2017). The Court found that, while plaintiff did not sufficiently allege that Liberty controlled Charter, plaintiff did adequately plead that the stockholder vote approving the share issuances and voting proxy agreement suffered from “structural coercion,” and therefore failed to ratify the transactions under the doctrine established by Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). Because it found the briefing insufficient to efficiently analyze whether plaintiff’s claims were direct or derivative, however, the Court reserved decision on the motion to dismiss and requested supplemental briefing on the issue.

In connection with the Acquisitions, which closed simultaneously on May 18, 2017, Charter sold to Liberty $5 billion of newly-issued shares in two issuances. Also, Liberty was granted a voting proxy on up to 6% of the shares held by the seller of Bright House, giving Liberty voting power of at least 25.01% at closing. Defendants referred to the issuances as “financing” for the Acquisitions. The share issuances and the voting proxy agreement were approved in a single vote by the majority of the stock of Charter not affiliated with Liberty—approximately 86% in favor—separate from a vote approving the merger with TWC. But Charter allegedly “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.”

All parties agreed that the Acquisitions contributed value to Charter. But plaintiff alleges that Charter’s directors breached their fiduciary duties of care and loyalty by agreeing to the Liberty share issuances and voting proxy agreement.

As the Court highlighted, “[u]nder 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.” In its analysis of the claims, the Court first rejected plaintiff’s contention that Liberty was a controlling shareholder of Charter. That contention was based on the 26% equity stake held by Liberty in advance of the transactions and its ability to designate four of Charter’s ten directors, as well as Liberty’s representation in unrelated correspondence with the Securities and Exchange Commission (“SEC”) that it controlled Charter. While the Court noted that these facts could give rise to a reasonably plausible inference of control, it concluded that such an inference was negated here by certain contractual restrictions on Liberty. Specifically, Liberty “could not acquire more than 35% of Charter stock, designate more than four out of ten directors, or solicit proxies or consents.” Accordingly, the Court found that, “for purposes of Corwin, no coercion exist[ed] from the presence of a controller.”

Nevertheless, the Court concluded that the complaint adequately pleaded that the stockholder vote approving the Liberty transactions at issue was “structurally coerced” because the benefits of the Acquisitions were “expressly conditioned on stockholder approval,” even though the Liberty transactions were “not necessary to the financing of the Acquisitions.” As the Court explained:

[O]ne 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 stockholders made a determination that the Issuances and Voting Proxy were in the interests of Charter.

Notably, the Court emphasized that “[i]t is a truism that every deal involves a compromise of sorts.” However, Vice Chancellor Glasscock explained that this trade-off is not appropriate when the concession granted is extrinsic to the benefit received, stating that “[f]iduciaries cannot interlard [a stockholder] 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.” Accordingly, the Court held that the stockholder vote had no cleansing effect under the Corwin doctrine.

The Court reserved decision, however, on whether the complaint sufficiently pleaded breaches of fiduciary duty. As Vice Chancellor Glasscock explained, since the briefing was insufficient for the Court to decide efficiently whether the action was appropriately brought directly or derivatively, which would affect the standard of review, the parties were ordered to provide supplemental briefing on that issue.

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