Matthew Sciabacucchi v. Liberty Broadband Corporation
Not available in text (2017)
Rule of Law:
A stockholder vote intended to ratify a transaction will not cleanse alleged breaches of fiduciary duty if the vote is structurally coerced, meaning fiduciaries conditioned the receipt of benefits from independent, value-enhancing transactions on the approval of allegedly self-interested, extraneous transactions.
Facts:
- Plaintiff Matthew Sciabacucchi was a stockholder of Charter Communications, Inc. ('Charter') at the time of the Acquisitions and continues to be.
- In May 2013, Liberty Media (predecessor to Liberty Broadband) purchased approximately 26.9 million shares of Charter, becoming its largest stockholder, and entered into an Original Stockholders Agreement with Charter.
- The Original Stockholders Agreement restricted Liberty Media from acquiring more than 35% of Charter's voting stock and from soliciting proxies, while allowing it to designate up to four directors on Charter's ten-member Board.
- In September 2014, Liberty Media spun off Liberty Broadband Corporation ('Liberty Broadband'), assigning all its rights and obligations under the Original Stockholders Agreement to Liberty Broadband, which then owned approximately 26% of Charter stock.
- Liberty Broadband made representations to the SEC that it controlled Charter to avoid regulation under the Investment Company Act of 1940, citing its ownership stake and right to designate directors.
- Charter pursued an acquisition of Bright House Networks, LLC ('Bright House') and a merger with Time Warner Cable ('TWC') in May 2015, which were expected to be value-enhancing transactions for Charter.
- As part of these transactions, Liberty Broadband proposed making an additional investment in Charter shares and converting its TWC shares into Charter shares.
- Charter's Board of Directors authorized management to make a revised offer for TWC, and later approved the TWC Merger, the New Bright House Transaction, and related transactions with Liberty Broadband.
- The TWC Merger and the New Bright House Transaction were expressly conditioned on Charter stockholders approving the Liberty Share Issuances ($4.3 billion and $700 million in newly issued shares to Liberty Broadband) and the Voting Proxy Agreement (granting Liberty Broadband a 6% voting proxy from Advance/Newhouse, Bright House's owner).
Procedural Posture:
- Plaintiff Matthew Sciabacucchi filed an original complaint in the Delaware Court of Chancery for breaches of fiduciary duties, alleging the proxy statement was materially incomplete.
- Plaintiff filed a Motion to Expedite and moved for a preliminary injunction in the Delaware Court of Chancery seeking to enjoin the Acquisitions.
- Charter supplemented its proxy statement, providing the previously undisclosed unlevered free cash flow projections (UFCF) and the text of the Voting Proxy Agreement.
- Plaintiff withdrew his Motion to Expedite and Motion for a Preliminary Injunction in the Delaware Court of Chancery.
- After the closing of the acquisitions, Plaintiff filed a Verified Amended Class Action Complaint in the Delaware Court of Chancery pleading four counts, including individual, class, and derivative claims for breach of fiduciary duty against the Director Defendants and the Stockholder Defendants.
- Defendants moved to dismiss the Complaint in the Delaware Court of Chancery under Court of Chancery Rule 12(b)(6) for failure to state a claim and Rule 23.1 for failing to make a demand on the Board.
- The Delaware Court of Chancery heard oral argument on Defendants' Motions to Dismiss.
- The parties submitted supplemental letters to the Delaware Court of Chancery in light of recent decisions of that Court.
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Issue:
Does a stockholder vote to approve allegedly self-interested transactions, which are expressly conditioned on the receipt of benefits from separate, value-enhancing transactions, operate as a cleansing ratification under Delaware law, even absent a controlling stockholder?
Opinions:
Majority - Vice Chancellor Glasscock
No, a stockholder vote to approve allegedly self-interested transactions, when expressly conditioned on the receipt of benefits from separate, value-enhancing transactions, does not operate as a cleansing ratification under Delaware law, even absent a controlling stockholder. The Court first determined that the Plaintiff failed to plead sufficient non-conclusory facts to make it reasonably conceivable that Liberty Broadband controlled Charter, despite Liberty Broadband's SEC filings claiming 'primary control' and 'significant influence.' The Court found that the Amended Stockholders Agreement and Charter’s Certificate of Incorporation imposed significant contractual restrictions on Liberty Broadband, such as limiting its board designees to four out of ten, restricting its share accumulation to 35% (later 39.99%), and prohibiting proxy solicitations, thereby preventing a finding of actual control over the Board. However, the Court found the stockholder vote structurally coercive, thus preventing ratification under Corwin v. KKR Financial Holdings LLC. Structural coercion occurs when extraneous factors, unrelated to the merits of the challenged transaction, may have influenced the stockholder vote, preventing the Court from determining that the vote represented an informed decision that the transaction itself was in the corporate interest. Here, Charter’s Board expressly conditioned the 'value-enhancing' acquisitions of TWC and Bright House on the stockholders' approval of the Liberty Share Issuances and the Voting Proxy Agreement. The Court reasoned that stockholders were forced to choose between foregoing lucrative deals or approving allegedly self-interested transactions that transferred wealth and voting power to an insider (Liberty Broadband). The Court inferred at the pleading stage that the Liberty Share Issuances and Voting Proxy Agreement were extrinsic to the Acquisitions, noting that the proxy statement did not indicate these financing terms were necessary or that the board sought alternative financing. Therefore, the vote did not reflect an uncoerced judgment on the merits of the Liberty transactions themselves. The Court reserved decision on the remainder of the motions to dismiss, requiring further briefing on whether the claims were direct or derivative.
Analysis:
This case significantly clarifies the limits of the Corwin doctrine, particularly regarding what constitutes 'uncoerced' stockholder approval. It establishes that even without a controlling stockholder, a board cannot 'strong-arm' shareholders into approving potentially disloyal transactions by bundling them with otherwise beneficial deals. This ruling provides plaintiffs a pathway to challenge transactions where the board leverages desirable outcomes to push through less favorable, insider-benefiting provisions, preserving judicial oversight in such circumstances. It reinforces the principle that shareholder ratification must be a true exercise of free and informed choice, not a Hobson's choice designed by fiduciaries.
