The Delaware Court of Chancery denied in part a motion to dismiss a lawsuit brought by a Charter stockholder ("Plaintiff") who challenged a voting proxy agreement between Liberty Broadband Corporation ("Liberty") and Charter Communications, Inc. ("Charter"), and two stock issuances made by Charter to Liberty. The stock issuances, worth $5 billion, were part of the "financing" of Charter's merger with Time Warner Cable and the purchase of Bright House Networks, LLC (see Sciabacucchi v. Charter Communications Corporation, et al.). Both third-party transactions were conditioned on Charter stockholders' approval of the share issuances to and voting agreement with Charter.
As described more fully in a Cadwalader memorandum, the Plaintiffs alleged that the Defendants breached their duties of loyalty owed to Charter and its stockholders in approving the Liberty-Charter transactions. The Plaintiffs specifically claimed that, among other things: (i) Liberty was paying shares for the newly issued Charter stock at a discount to the Charter's market price, (ii) Charter's issuance of stock to Liberty relating to the Time Warner merger was unfair on the grounds that the price did not take into consideration the "project value of the combined companies following the merger," and (iii) Charter's decision to allow Liberty to receive stock for its Time Warner shares was also unfair because Liberty improperly received a tax benefit. Additionally, Plaintiff also alleged a breach of duty in connection with a transaction where Liberty received a 6 percent voting proxy.
The attorneys explained that corporate overpayment claims cannot be simultaneously "direct and derivative in the absence of a controlling stockholder," citing El Paso Pipeline GP Co., LLC v. Brinckerhoff, in which the Supreme Court struck down claims that a direct and derivative claim existed where a corporate overpayment led to the "extraction of strictly economic value." The attorneys further identified several key "takeaways" from the ruling:
- material outside business relationships, public comments pertaining to a director's influence, and an interested party's sway over a director's full-time employment continue to be "indicia of a lack of independence at the pleading stage";
- Delaware courts will consider public statements made by a director related to an interested party's influence; and
- the independence of the full ten-person Charter Board determined whether the business judgment rule applied.
The memorandum was authored by Jason M. Halper, Ellen V. Holloman and James M. Fee.
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