Friday, June 02, 2017

No Corwin cleanse for structurally-coercive Charter shareholder vote

By Mark S. Nelson, J.D.

A shareholder suit alleging defects in Charter Communications, Inc.’s attempt to acquire two companies was not a candidate for applying Delaware’s Corwin’s cleansing theory because of the structurally-coercive nature of the shareholder vote. But the director defendants’ bid to dismiss the case will have to await further action because the vice chancellor found the briefing in the case deficient regarding the next set of issues the court must address, including whether the shareholders’ claims are direct or derivative (Sciabacucchi v. Liberty Broadband Corporation, May 31, 2017, Glasscock, S.).

Deal structure. Liberty Broadband Corporation was a major shareholder of Charter Communications, Inc., which sought to acquire another company in the communications industry to match rival Comcast’s bid to acquire Time Warner Cable (TWC). As a result, Charter sought to acquire Bright House Networks, LLC and agreed to help facilitate the Comcast-TWC deal by swapping subscribers. But this arrangement, which was contingent on a successful Comcast-TWC deal, fell through when the Comcast-TWC deal failed.

Charter’s ensuing second round of deal making focused on acquiring Bright House and merging with TWC. Charter’s board ultimately approved both deals: first, the four Liberty Broadband designees on Charter’s board approved and departed the room; then, the remaining Charter directors approved both deals. In preparation for the Charter shareholder vote, Charter filed a proxy with the SEC in which the company said a vote to approve the deals would require the approval of a majority of Charter’s unaffiliated common shares.

But the TWC and Bright House deals were also conditioned on approval of several other items: a share issuance (it was supposed to help finance the Bright House and TWC deals) and a voting proxy agreement. The TWC merger garnered 90 percent approval (Bright House is not a party to the case). Eighty-six percent of shareholders approved the related share issuance, stock consideration, and voting proxy agreement after some shares were excluded from the tally. Liberty Broad Band ended up with about the same voting power it had before the transactions.

Shareholder vote structurally-coercive. The court quickly rejected shareholders’ argument that Liberty Broad Band controlled Charter. And the court noted that shareholders did receive value from the Bright House and TWC deals. But the court also emphasized that Charter’s shareholders were required to approve "extraneous" items, including the share issuance to a major Charter shareholder as well as the voting proxy agreement. As a result, the court questioned whether a scenario in which shareholders get a net benefit could legitimately be cleansed under Corwin.

Under the Delaware Supreme Court’s Corwin opinion, authored by Chief Justice Strine, the business judgment rule applies to a transaction that was approved by a fully informed, uncoerced vote of a majority of disinterested shareholders. Such a vote is said to cleanse the approval of any breaches of duty.

Vice Chancellor Glasscock explained Corwin: "The rationale behind Corwin is hardly new; it amounts to a judicial recognition that the agency problems inherent in transactions made by directors involving the property of the stockholders are obviated by a vote of those stockholders in favor of the transaction, so that the will of the owners effectively supersedes that of the agents. In other words, there is little utility in a judicial examination of fiduciary actions ratified by stockholders."

With respect to this case, the vice chancellor reasoned that "extraneous" factors played a critical role in the shareholder vote. For the vice chancellor, the agency problem that would be cleansed in a typical application of Corwin instead persists under the "unique circumstances" posed by the Charter shareholder vote. The vice chancellor further explained:
"Coercion" is a loaded term, but a vote so structured by the Defendants, to accept one (allegedly self-interested) transaction so as not to lose the benefit of another independent transaction, cannot to my mind be considered uncoerced. Put another way, a vote so structured does not eliminate the agency problem by substituting the will of the stockholder/owners for that of the directors, because the directors have structured the vote in such a way that the vote must be in consideration of factors extraneous to the matter voted on. The stockholders did not decide, necessarily, that the Liberty Share Issuances and the Voting Proxy Agreement were "in their best interest," they only decided that the Acquisitions and the Issuances and Voting Proxy Agreement were, on net, beneficial.
The vice chancellor said applying Corwin here could fail to achieve equity by legitimizing a "white-wash." According to the court, Corwin should not apply in cases where directors seek to shirk accountability by conditioning deals on shareholder approval of "self-dealing riders," even absent a controller. Moreover, the court noted that Chancellor Bouchard has previously warned against Corwin being used to broadly free corporate fiduciaries of their responsibilities. Whether the Charter shareholders pleadings stated a claim will have to await further briefing.

The case is No. 11418-VCG.

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