Liberty Media Corp. v. The Bank of NY, C.A. No. 5701-VCL (Del. Ch.April 29, 2011) (Laster, V.C.)
In this opinion, the Court of Chancery held that plaintiffs, Liberty Media Corporation and Liberty Media LLC (together, “Liberty”), were entitled to a declaration that the pending split-off of the assets and liabilities attributed to Liberty’s Capital and Starz tracking stock groups (the “Capital Split-Off”) did not constitute a disposition of “substantially all” of Liberty’s assets for purposes of a successor obligor provision in a bond indenture governed by New York law. The successor obligor provision prohibited Liberty from selling, transferring or otherwise disposing of “all or substantially all” of its assets unless the successor entity assumes Liberty’s obligations under the indenture. The Court applied the step-transaction doctrine to evaluate whether other spin-off and split-off transactions undertaken by Liberty over a period of several years should be aggregated with the proposed Capital Split-Off for purposes of an “all or substantially all” analysis.
In June 2010, Liberty announced the proposed Capital Split-Off. A holder of bonds issued under the indenture objected in writing to the Capital Split-Off, contending it might violate the successor obligor provision of the indenture. Liberty commenced the action against the indenture trustee, seeking injunctive and declaratory relief that the proposed Capital Split-Off would not constitute a disposition of “substantially all” of Liberty’s assets.
While it was undisputed that the proposed Capital Split-Off viewed in isolation would not constitute a transfer of “substantially all” of Liberty’s assets, the indenture trustee argued that for purposes of determining whether the Capital Split-Off would violate the indenture, the transaction must be viewed in conjunction with the three previous distributions of assets to Liberty’s stockholders. The prior dispositions included (i) the spin-off of Liberty Media International, Inc. in 2004, (ii) the spin-off of Discovery Holding Company in 2005 and (iii) the split-off of Liberty Entertainment, Inc. and its subsequent merger with DirecTV in 2009. The indenture trustee argued that the Capital Split-Off and the three prior distributions were part of an overall “disaggregation strategy” designed to remove assets from the corporate structure against which the bondholders’ interests were secured. The bondholders asserted that if viewed as a whole, the four transactions would constitute a disposition of “all or substantially all” of Liberty’s assets, in violation of the indenture.
In reaching his decision, the Vice Chancellor noted that “[c]ourts applying New York law have recognized that, under appropriate circumstances, multiple transactions can be considered together when determining whether a transaction constitutes a sale of all or substantially all of the corporation’s assets” but that “[n]one of these sources, however, has articulated a clear standard for when transactions should be aggregated.” The Court explained that the Second Circuit’s decision in Sharon Steel v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982) is the leading decision on aggregating transactions for purposes of a “substantially all” analysis in the successor obligation provision context. Although Sharon Steel did not expressly apply the step-transaction doctrine, the Court examined several other decisions applying the step-transaction doctrine when evaluating the issue of aggregation for purposes of a “substantially all” assets analysis, and concluded that the Sharon Steel analysis fit within the step-transaction framework. As the Court explained, the step-transaction doctrine applies, and formally separate but related transactions will be viewed together as components of an overall plan, if the transactions meet one of three tests: 1) the “end result test” – applied “if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve an ultimate result”; 2) the “interdependence test” – applied when “the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series”; and 3) the “binding-commitment test” – applied “if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.”
In applying each of the foregoing tests, the Court held that the spin- and split-off transactions undertaken by Liberty over a seven-year period were not sufficiently connected to warrant aggregating the four transactions. The Court explained that Liberty had not pursued a unified disaggregation strategy with a sufficiently well-defined starting point or a sufficiently definitive end result to warrant applying the step-transaction doctrine. The Court reasoned that each of the transactions resulted from a distinct and independent business decision based on the facts and circumstances that Liberty faced at the time, were not part of a master plan to strip Liberty’s assets out of the corporation subject to bondholder claims, and were each separated from the others by a matter of years. The Court noted that Liberty’s overarching business strategy has always consisted of consolidating ownership of businesses where Liberty could exercise control or had a clear path to control, while exploring all possible alternatives for assets that did not fit this profile, including acquisitions, dispositions, complex swaps, spin-offs and split-offs. It suggested that if there were facts to imply a conscious plan to achieve a particular endpoint through asset dispositions or cause to believe that Liberty was attempting to evade the legitimate claims of bondholders, there would be a stronger case for aggregation. The Court concluded that “[f]ollowing a consistent business strategy and deploying signature M&A tactics does not transmogrify seven years of discrete, context-specific business decisions into a single transaction.”
Additionally, in discussing certain precedent regarding the meaning of the phrase “all or substantially all,” the Court noted the use of the phrase in both shareholder voting rights statutes (analogous to Section 271 of the Delaware General Corporation Law) and the indenture context. While some case law suggests that the phrase could be construed differently in the two contexts, the Court made it clear that it could see no basis to construe the same phrase differently.