In GAMCO Asset Management v. iHeartMedia, Delaware's Court of Chancery considered claims that a controlling stockholder's liquidity needs created conflicts in otherwise arm's-length transactions with third parties. As demonstrated in New Jersey Carpenters Pension Fund v. infoGROUP, a controlling stockholder that receives the same financial benefit as the minority stockholders must also receive a "unique benefit" for the challenged transaction to be subjected to the entire fairness standard of review. Circumstances like infoGROUP, however, represent extreme cases. As discussed below, the plaintiff in iHeartMedia was unable to persuade the court that infoGROUP-like circumstances existed in its case.
GAMCO was a stockholder of Clear Channel Outdoor Holdings Inc. (CCOH) at the time it initiated its derivative action, holding roughly 9.9 percent of CCOH's Series A common stock. Defendant iHeartCommunications Inc. (iHC) owned approximately 90 percent of CCOH's outstanding stock and nearly 99 percent of CCOH's voting power. IHC is a wholly owned subsidiary of defendant iHeartMedia Inc. (iHM). In December 2015, CCOH announced that, through an indirect wholly-owned subsidiary, CCOH would issue $225 million in 8.75 percent senior notes maturing in 2020 through which CCOH's subsidiary would receive $217.8 million in net proceeds (the note offering). Only days following the announcement, CCOH declared a special cash dividend for the entire $217.8 million, payable pro rata to holders of all Class A and Class B common stock. In the first quarter of 2016, CCOH entered into a series of asset sales that generated $602 million (the asset sales). Subsequently, CCOH declared a special cash dividend to all Class A and Class B common stockholders in the amount of $540 million.
The complaint challenged, among other things, that the note offering and the Asset Sales in its derivative action, arguing that both transactions represented "commercially unreasonable stripping of value from CCOH" for the defendants' gain. The defendants moved to dismiss the complaint and argued, to the contrary, that the note offering and asset sales were arms-length transactions and did not strip CCOH of any core assets. GAMCO contended that its breach of fiduciary duty claims against the defendants, as controllers of CCOH, must be reviewed under the entire fairness standard of review as the note offering and asset sales were allegedly consummated to address the defendants' unique and acute liquidity needs. The defendants countered that Delaware precedent allows for the defendants to be afforded the deferential business judgment rule analysis since all the CCOH stockholders received pro rata benefits from the challenged transactions.
GAMCO relied upon a line of cases in which Delaware courts applied the entire fairness standard of review to transactions where the controlling stockholder faced acute liquidity crises. In its decision, the court focused on the 2011 infoGROUP litigation. The plaintiff in infoGROUP attacked a merger with a third party on the basis that it was purportedly orchestrated by infoGROUP's largest stockholder and former CEO and chairman to address his need for liquidity to fund his other businesses and debts. The former CEO utilized a pattern of intimidation and bullying to force his will upon infoGROUP's board. Based on the extreme facts present in infoGROUP, the Court of Chancery required the defendants to establish the entire fairness of the challenged merger because infoGROUP's controller was interested in the transaction, exercised his position of control over the board to force it to provide him with a unique benefit and tainted the sales process which prejudiced the minority stockholders.
In considering GAMCO's argument, the court noted that infoGROUP has been described as an "extreme case." The court explained that only narrow circumstances exist where a controller's need for liquidity could constitute a disabling conflict irrespective of the minority stockholders receiving pro rata treatment with the controller. The court, citing In re Synthes Stockholder Litigation, set forth certain unique circumstances supporting the finding of a disabling conflict such as "a crisis, fire sale where the controller in order to satisfy an exigent need ... agreed to a sale of the corporation without any effort to' engaged in a sales process that would reflect market value." When examining the defendants' conduct in the note offering and asset sales, the court did not find any conduct rising to the level present in infoGROUP or described in Synthes. The defendants did not compete with CCOH's minority stockholders by sacrificing value through threats, a flawed process or an unfair price. Rather, GAMCO only made conclusory allegations that the transactions were ill-timed and for suboptimal consideration. For instance, GAMCO criticized CCOH's agreement to accept a $1.5 million reduction in the purchase price of certain assets sold to a third party, so that it could rely on a REIT exemption from Hart-Scott-Rodino review. The court was not persuaded that this relatively minor consideration reduction reflected the kind of "fire sale" necessary to find a conflicted controller.
The court ultimately dismissed GAMCO's fiduciary duty claims pursuant to Rule 12(b)(6). Despite the result, practitioners should take note of the thoughtful analysis rendered by the court on the "unique benefit" arguments offered by the parties. While dubbed an "extreme case," infoGROUPstands as a benchmark for conduct and circumstances necessary to satisfy the unique benefit prong when seeking to demonstrate that a controller is conflicted in a third-party transaction where the consideration is shared pro rata.