The "step-transaction doctrine" was recently analyzed by the Delaware Court of Chancery in Liberty Media Corporation and Liberty Media, LLC v. The Bank of New York Mellon Trust Company, N.A. In this decision, Vice Chancellor Laster examined this doctrine in the context of whether Liberty Media’s proposed split off of its businesses attributed to Liberty’s Capital Group and Starz Group (the “Capital Splitoff”) as a new publicly traded company, constituted a transfer of substantially all of Liberty Media’s assets.
Certain bondholders objected to the proposed transaction, claiming that Liberty had pursued a “disaggregation strategy” designed to remove assets from the corporate structure against which the bondholders have claims, and shift the assets to Liberty’s shareholders. The proposed Capital Splitoff would be Liberty’s fourth major distribution of assets since March 2004. According to the bondholders, the Capital Splitoff, when aggregated with the other three distributions, would violate a Successor Obligor Provision in a July 7, 1999 Indenture pursuant to which Liberty agreed not to sell substantially all of its assets unless the successor entity assumed Liberty’s liabilities under the Indenture.
In determining whether to aggregate the distributions, the Court examined the “step-transaction doctrine,” under which multiple sales may be aggregated to be considered a sale of substantially all of the assets of an entity. According to the Court, the doctrine applies if the component transactions meet any of the three tests:
- the “end result test,” which is invoked “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result”;
- the “interdependence test,” whereby transactions will be treated as one if “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series”; or
- the “binding-commitment test,” under which “a series of transactions are combined only if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”
Applying the step-transaction doctrine to this case, the Court of Chancery found that each of the four distributions of assets had their own business justifications, and thus could not be aggregated for purposes of determining whether they constituted a sale of substantially all of Liberty Media’s assets. “The “transactions. . . were not part of a master plan to strip Liberty’s assets out of the corporate vehicle subject to bondholder claims.”