Tuesday, November 29, 2016

Board not liable for inability to extricate company from ‘symbiotic’ relationship

By Anne Sherry, J.D.

A general release foreclosed an investor’s suit over Clear Channel Outdoor Holdings’ continued entanglement with its former parent, iHeart Communications. GAMCO Asset Management invested in CCOH despite the intercompany agreements that locked it into a “symbiotic” relationship with iHeart. GAMCO’s suit resurrected many of the same derivative claims that were settled in 2013, the Delaware Court of Chancery found (GAMCO Asset Management Inc. v. iHeartMedia Inc., November 23, 2016, Slights, J.).

The intercompany agreements, entered into in anticipation of CCOH’s 2005 IPO, positioned iHeart so that it could exercise significant control over nearly every aspect of CCOH’s operations. iHeart contracted to provide management, IT, legal, and executive services to CCOH, and mutual financing commitments required CCOH to sweep its excess cash to iHeart every day.

Derivative suits then and now. In 2012, CCOH stockholders sued derivatively on the basis that iHeart was abusing its position as controlling stockholder. An independent special litigation committee of CCOH concluded that CCOH could not breach or modify the agreements without risking irreparable consequences; the committee negotiated a forward-looking settlement that instituted corporate governance reforms to address conflicts and manage the ongoing relationship between the companies.

Citing Yogi Berra, the court suggested that GAMCO’s suit a few years later was “like déjà vu all over again.” Like the 2012 plaintiffs, GAMCO argued that the CCOH board’s compliance with the contracts did not excuse its failure to extricate CCOH from the intercompany agreements in the face of iHeart’s deteriorating financial condition. GAMCO also alleged that the CCOH board breached its fiduciary duties and committed corporate waste when it approved a debt offering and asset sales to fund special dividends so that iHeart could address its liquidity needs.

Every new claim barred. The court concluded that the claims relating to the intercompany agreements were barred either by the 2013 settlement agreement and release or by res judicata. The court also dismissed the claims relating to the asset sales and debt offerings because these were arm’s-length transactions that secured pro rata benefits to all CCOH shareholders. GAMCO failed to allege facts that came close to overcoming the business judgment presumption with respect to those transactions.

While GAMCO was correct that many of the facts on which it based its claims occurred after the 2013 settlement, the claims were based on the same or similar operative facts as the 2012 lawsuit. iHeart’s financial condition continued to deteriorate following the settlement, but the parties anticipated that and negotiated forward-looking liquidity triggers to address it. GAMCO failed to allege that these triggers had been activated or that the board failed to comply with its monitoring and reporting obligations under the settlement.

Again, GAMCO was correct that Delaware does not permit corporate fiduciaries to contract around their duties. But the intercompany agreements placed CCOH in a difficult position; then-Chancellor Strine said at the 2013 fairness hearing that he could conceive of no legal theory that would permit CCOH to back out. “Given the corner into which the Intercompany Agreements have painted the CCOH Board, there is no reasonably conceivable basis upon which GAMCO can establish that the Board has breached its fiduciary duty by adhering to the carefully-negotiated governance and monitoring provisions agreed to in the 2013 Settlement,” the chancery court concluded.

The case is No. 12312-VCS.

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