C.A. no. 5702 (Del. Sept. 21, 2011) (Holland, J.)
In this en banc decision, the Delaware Supreme Court affirmed the Court of Chancery’s ruling that a proposed split-off of assets by Liberty Media Corporation (“Liberty”) was not sufficiently connected to prior transactions to warrant aggregation of the proposed split-off with those prior transactions for purposes of determining whether the proposed split-off would constitute a disposition of substantially all assets under a successor obligor provision in a bond indenture governed by New York law (the “Indenture”).
In June 2010, Liberty announced its plan to split off the businesses, assets and liabilities attributable to its Capital and Starz tracking stock groups (the “Split-Off”). Counsel for an anonymous bondholder claimed that the transaction might violate the successor obligor provision of the Indenture, which prohibits the disposition of “substantially all” assets unless the entity to which such assets are transferred assumes Liberty’s obligations under the Indenture. In response, Liberty commenced this action against the Bank of New York Mellon Co. as indenture trustee (the “Trustee”), seeking injunctive and declaratory relief that the proposed Split-Off would not constitute a disposition of “substantially all” of Liberty’s assets. All parties agreed that if considered in isolation, the Split-Off would not constitute a disposition of “substantially all” assets. However, the Trustee argued that the Split-Off must be viewed in conjunction with three prior spin-off and split-off transactions consummated by Liberty over the preceding seven-year period. The Trustee argued that when considered collectively, the four transactions would constitute a disposition of “substantially all” assets.
In making a determination not to aggregate the multiple transactions, the Court of Chancery largely relied on precedent from the Second Circuit case, Sharon Steel Corp. v. Chase Manhattan Bank, N.A. (which it referred to as “the leading decision on aggregating transactions for purposes of a ‘substantially all’ analysis” in the context of a successor obligor provision) and on the step-transaction doctrine, which treats the steps in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked.
The Supreme Court acknowledged that “[c]ourts applying New York law have determined that, under appropriate circumstances, multiple transactions can be considered together, i.e., aggregated, when deciding whether a transaction constitutes a sale of all or substantially all of a corporation’s assets.” It further acknowledged that the successor obligor provision at issue recognized that aggregation may occur, in that it states that Liberty can comply with the provision only if “immediately after giving effect to such transaction or series of transactions, no Event of Default . . . shall have occurred.”
Drafters began including the phrase “series of transactions” in successor obligor provisions shortly after the Sharon Steel decision, and the issue was addressed in comments to the 1983 Model Simplified Indenture. The comments warn that “serious consideration must be given to the possibility of accomplishing piecemeal, in a series of transactions, what is specifically precluded if attempted as a single transaction.” Given this history, and the fact that comments to a later iteration of the Model Simplified Indenture specifically cited Sharon Steel, the Supreme Court concluded that the presence of “series of transactions” language in a post-Sharon Steel successor obligor provision must be “meant to underscore that a disposition of ‘substantially all’ assets may occur by way of either a single transaction or an integrated series of transactions, as occurred in Sharon Steel.” Accordingly, the Supreme Court found that the Second Circuit’s decision in Sharon Steel was particularly instructive in determining whether aggregation of transactions was appropriate in the instant case.
In Sharon Steel, the Second Circuit held that the aggregation of multiple transactions was appropriate when each transaction was part of a “plan of piecemeal liquidation” and an “overall scheme to liquidate.”
The Court of Chancery had made factual findings that, unlike in the facts warranting aggregation in Sharon Steel, Liberty had not developed a plan or scheme to dispose of its assets piecemeal with a goal of liquidating nearly all its assets, or removing assets from the corporate structure to evade bondholder claims. Therefore, it found that the four Liberty transactions should not be considered together. The Supreme Court observed that the Court of Chancery could have ended its analysis at that point. However, the Court of Chancery “added a second layer of analysis” by also applying the step-transaction doctrine as an analytical tool to bring further clarity to the issue of aggregation.
On appeal, the Trustee challenged the Court of Chancery’s use of the step-transaction doctrine. The Supreme Court found that it was unnecessary to reach or decide whether the step-transaction doctrine would be adopted under New York law to determine whether to aggregate a series of transactions in a “substantially all” analysis. It found that even if the Court of Chancery had not applied the steptransaction doctrine, its legal conclusion, based on the facts adduced at trial, that the four Liberty transactions were not sufficiently connected to warrant aggregation was supported by and consistent with aggregation principles articulated in Sharon Steel. Therefore, the Court of Chancery’s ruling that the Split-Off would not violate the Indenture’s successor obligor provision was affirmed.
The full opinion is available here.