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Sciabacucchi v. Liberty Broadband Corp. - No. 11418-VCG, 2017 Del. Ch. LEXIS 93 (Ch. May 31, 2017)

Rule:

Ratification will not cleanse a transaction where the vote is structurally coercive, as where the directors have created a situation where a vote may be said to be in avoidance of a detriment created by the structure of the transaction the fiduciaries have created, rather than a free choice to accept or reject the proposition voted on. In other words, a dismissal based on ratification represents a determination by the court that the stockholders have found the challenged transaction to be in the corporate interest. If the vote was structured in such a way that the vote may reasonably be seen as driven by matters extraneous to the merits of the transaction, the court cannot determine that the stockholders demonstrated thereby a determination that the challenged transaction was in the corporate interest. Such a vote is structurally coercive, and no cleansing by ratification obtains. The result is simply that a traditional analysis of the sufficiency of the complaint must follow. Business judgment in such a situation may nonetheless apply if a sufficient and independent special committee negotiates the deal with the controller, and the deal is conditioned from the outset on a positive vote of the majority of the unaffiliated shares.

Facts:

The directors of the Nominal Defendant, Charter Communications, Inc. ("Charter" or the "Company"), structured an acquisition of two other entities in the same industry, communications media, as Charter. Both acquisitions — the purchase of non-party Bright House Networks, LLC ("Bright House") and the merger with Time Warner Cable ("TWC") — were accomplished at the same time. Those transactions (the "Acquisitions") were not themselves the direct cause of the Plaintiff's Complaint; all parties agreed that these transactions contributed value to Charter. The Plaintiff was a Charter stockholder. His Complaint focused on two related transactions: The Defendant directors of Charter issued equity to an insider, the largest stockholder of Charter, Defendant Liberty Broadband Corporation, purportedly to finance the Acquisitions in part. According to the Plaintiff, Liberty Broadband controlled Charter, and caused the Defendant directors and officers of Charter to structure the issuances of equity in a way favorable to Liberty Broadband and detrimental to Charter. The Complaint alleged that all these Defendants breached duties of loyalty, owed to Charter as well as to its stockholders directly, with respect to these transactions (the "Liberty Share Issuances" or "Issuances"). The Plaintiff contended that the Issuances were not necessary to the financing of the Acquisitions. The Plaintiff also alleged breaches of duty in connection with an additional transaction by which Liberty Broadband received a 6% voting proxy (the "Voting Proxy Agreement"). The Liberty Share Issuances and the Voting Proxy Agreement were approved in a single vote by the majority of the stock of Charter not controlled by or affiliated with Liberty Broadband, separate from the vote approving the merger with TWC.

Issue:

Was the vote by the shareholders that approved the equity issuance and the Voting Proxy Agreement ratify any potential wrongdoing by the directors?

Answer:

No

Conclusion:

The court determined that Liberty Broadband did not control the corporation based on review of the sharehodler’s agreement that limited its ability to assert its will over the corporation, such that there was no inherent coercion. A vote by the shareholders that approved the equity issuance and the Voting Proxy Agreement did not ratify any potential wrongdoing by the directors because it was not a free and informed vote, the equity issuance and the Voting Proxy Agreement were extraneous to the acquisitions, and the vote was coercive because it was tied to receiving the benefits of the acquisitions, such that the business judgment rule was not imposed by ratification under Corwin.

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