Structural Coercion Negated Cleansing Effect Under 'Corwin'
Under the Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015), business judgment review applies to cleanse a fiduciary challenge to a noncontrol transaction that was approved by an uncoerced, fully-informed, disinterested stockholder vote. Absent a claim of waste, the result of a Corwin-qualifying stockholder vote is dismissal. The Corwin doctrine is premised on the rationale that when a disinterested majority of stockholders approve a transaction, the vote represents their determination that the transaction is in the corporate interest, and Delaware courts will avoid second-guessing the stockholders' decision by applying the deferential business judgment rule.
While the Delaware courts have applied Corwin to dismiss a number of post-closing fiduciary challenges, firmly establishing the protection that stockholder approval can afford a transaction under Delaware law, the Court of Chancery has recently cautioned that Corwin "was never intended to serve as a massive eraser, exonerating corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained," as in In re Massey Energy Co. Derivative & Class Action Litigation, C.A. No. 5430-CB (Del. Ch. May 4, 2017) (Bouchard, C.).
In its recent decision, Sciabacucchi v. Liberty Broadband, No. 11418-VCG (Del. Ch. May 31) (Glasscock, V.C.), the Court of Chancery reiterated this admonition in connection with its holding that Corwin did not apply to cleanse a fiduciary challenge to a transaction, which increased the equity and voting power of the largest stockholder, where the stockholder vote was structurally coerced. The court reasoned that because the stockholder vote to receive the benefits of two lucrative corporate acquisitions was tied to the stockholders' approval of an "extraneous" alleged self-dealing issuance of equity and increased voting power to the largest stockholder, the directors had coerced the stockholder vote in favor of this extrinsic transaction. Thus, stockholder ratification under Corwin was unavailable to cleanse the alleged self-dealing transaction, and the court directed further briefing to consider whether the fiduciary-duty claims themselves were legally sufficient in the motion to dismiss.
The nominal defendant Charter Communications purchased Bright House Networks and acquired by merger Time Warner Cable in strategic transactions that were value enhancing to stockholders. The plaintiff's complaint focused, however, on a transaction related to the acquisitions. Charter's directors issued additional equity to its largest stockholder, Liberty Broadband, which held a 26 percent equity interest in Charter, to finance a relatively insignificant part of the total financing necessary to effectuate the two acquisitions. In addition, Liberty received a 6 percent voting proxy that increased its stockholder voting power. While this transaction was submitted for a separate stockholder vote apart from the vote on the acquisitions, the stockholders were nevertheless informed that the lucrative acquisitions of Bright House Networks and Time Warner Cable were expressly conditioned on their approval of the issuance of additional equity to Liberty and the voting proxy that increased its voting power.
The plaintiff brought fiduciary-duty claims against Charter's directors challenging their alleged self-dealing transaction to increase the equity and voting power of the largest stockholder Liberty. To avoid the cleansing effect of the stockholder vote under Corwin, plaintiffs claimed that the directors coerced the stockholder vote in favor of this alleged self-dealing transaction for reasons unrelated to its economic merit. The plaintiff asserted that while the Charter directors achieved value for stockholders in the acquisitions, the directors then conditioned receipt of the benefits in the acquisitions on a stockholder vote in favor of the alleged self-dealing issuance of additional equity to Liberty and the increase in its voting power, both of which were "extraneous" to and unnecessary to consummate the acquisitions.
Court of Chancery Finds Stockholder Vote Was Structurally Coerced
The court ruled that because the stockholder vote was structurally coerced, Corwin did not apply to cleanse a fiduciary challenge to the alleged self-dealing transaction, which increased the equity and voting power of Charter's largest stockholder. The court found that for the stockholders to receive the lucrative benefits of Charter's two proposed value-enhancing acquisitions, the stockholders had to also vote to approve the alleged self-dealing issuance of additional equity to Charter's largest stockholder and to increase that stockholder's voting power. The court reasoned that by tying the right to receive the benefits in the acquisitions to the stockholders' vote in favor of an alleged self-dealing issuance of equity and increased voting power to the largest stockholder, the directors had coerced the stockholder vote in favor of the transaction for reasons unrelated to its economic merit. In contrast to being inherent elements of the acquisitions or their sales processes, or a transaction that was inherently part of or necessary to effectuate the acquisitions, the court found that the issuance of equity to the largest stockholder and the increase in that stockholders' voting power were "extraneous" to and unnecessary to consummate the acquisitions. The court explained that the issuance of equity purportedly to finance the two acquisitions was a relatively-insignificant part of the total financing necessary to effectuate the acquisitions. The directors had not determined that the acquisitions could only be financed or consummated by the issuance of equity to finance them, or that the issuance of equity to the largest stockholder was fair to Charter or the other stockholders. In sum, the court concluded that the directors had allegedly tacked on an alleged self-dealing extrinsic rider to the lucrative acquisitions to strong-arm a favorable vote on the issuance of equity to the largest stockholder and the increase in its voting power.
This structural coercion precluded a determination that the vote represented a stockholder decision that the alleged self-dealing transaction was in the corporate interest. The result was that ratification under Corwin was unavailable to cleanse the alleged self-dealing transaction, and the court was then left to consider whether the fiduciary-duty challenges stated a legally sufficient claim in the motion to dismiss.
A Corwin-qualifying stockholder vote will continue to set a high bar for post-closing fiduciary duty claims in M&A transactions. But, to ensure that stockholder ratification under Corwin is available to cleanse fiduciary-duty challenges, practitioners must be careful to structure any financing, equity issuances, voting-power agreements or any elements of a transaction in a way that makes them inherently part of the overall transaction and necessary to its consummation. This structure will allow a court to conclude that a stockholders' vote represents their determination that the transaction, including all of its intrinsic elements, is in the corporate interest, and will ensure that the vote cleanses fiduciary challenges to the transaction.