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In re Sirius S'holder Litig., C.A. No. 7800-CS (Del. Ch. Sept. 27, 2013) (Strine, C.)

September 27, 2013

In this opinion, Chancellor Strine dismissed plaintiffs’ complaint challenging, among other things, open-market purchases by Liberty Media Corporation (“Liberty”) of stock of Sirius XM Radio, Inc. (“Sirius” or the “Company”), which resulted in Liberty obtaining majority ownership of Sirius.  The Chancellor ruled that plaintiffs’ claims were repackaged challenges to the decision of the Sirius board to enter into fully disclosed contracts in 2009, pursuant to which the Sirius board agreed not to adopt a poison pill rights plan that would frustrate Liberty’s ability to obtain majority ownership.  The Court therefore held that the claims in the complaint were time-barred.

In 2009, Sirius was facing bankruptcy because it could not obtain financing in the frozen credit markets to repay notes that soon would come due.  The Company’s search for alternative funding led Sirius to enter into certain agreements with Liberty in February 2009.  Liberty provided Sirius with $530 million in loans in exchange for, among other things, preferred stock convertible to 40 percent of Sirius’s outstanding common shares.  The terms of the preferred stock gave Liberty the right to designate five out of thirteen Sirius directors, as well as consent rights with respect to certain corporate actions, including any grant or issuance of equity securities.  In a separate investment agreement, Liberty agreed to a standstill provision that prevented it from acquiring more than 49.9% of the Company for three years.  Sirius also agreed in the investment agreement not to adopt a poison pill or other defensive measures that would prevent Liberty from purchasing additional shares after expiration of the standstill period (the “Anti-Takeover Provisions”).  The material terms of the parties’ agreements and the agreements themselves were publicly disclosed at the time of the transaction and thereafter.

The market price of Sirius shares increased dramatically during the standstill period, from $0.15 to over $2 per share.  The standstill period ended on March 6, 2012 and Liberty informed Sirius that it intended to acquire through conversion of its preferred shares and open market purchases more than 50% of the outstanding shares of the Company.  Though it publicly acknowledged Liberty’s intentions, the Sirius board did not take action to prevent Liberty from acquiring more shares, citing their obligations under the investment agreement.  During the spring and summer of 2012, Liberty applied twice to the Federal Communications Commission for permission to transfer control of Sirius’s broadcasting licenses.  The Sirius board opposed Liberty’s first attempt, which was rejected by the FCC because Liberty was not yet a majority stockholder and did not qualify for de facto control because it had not yet indicated its intent to exert control over the Company.  Liberty filed its second application with the FCC, this time for de jure control, based on its assertion that it intended to obtain majority ownership of Sirius within 60 days through a combination of open market purchases and conversion of its preferred shares.  The Sirius board did not contest Liberty’s second FCC application, which was granted on January 3, 2013.  Liberty announced that it had obtained majority control of Sirius on January 17, 2013.

Plaintiffs originally filed multiple actions in August 2012.  Those actions were consolidated, and Plaintiffs filed a second amended complaint (the “Complaint”) after Liberty’s announcement that it had obtained majority ownership.  Plaintiffs alleged breaches of fiduciary duty against the Sirius board and against Liberty as a controlling stockholder.  Plaintiffs also sought a declaration that the Anti-takeover Provisions were unenforceable.

Plaintiffs argued that they were not challenging the February 2009 transaction with Liberty, but rather were challenging the Sirius board’s 2012 failure to adopt a poison pill to prevent Liberty’s open market purchases.  Plaintiffs argued that their claims, therefore, were well within the 3-year statute of limitations presumptively applied in equity to alleged breaches of fiduciary duty.  The Court concluded, however, that any cause of action plaintiffs might have had against the board accrued at the time it entered into the February 2009 agreements with Liberty.  At that time, the Sirius board agreed, in an arms-length transaction, that it would not adopt a poison pill or other defensive measure applicable to Liberty after the standstill period expired.  That agreement was fully disclosed in 2009.  Although plaintiffs argued that they had been “lulled into repose” and were unaware of Liberty’s intention to assume control, the Court found that “reasonable Sirius stockholders were on full notice of the Investment Agreement’s terms,” and that therefore “there is no excuse for the plaintiff’s failure to challenge the Anti-Takeover Provisions within the three-year statute of limitations.”

The Court explained that “plaintiffs here . . . cannot ignore the reality . . . that the Sirius board was contractually precluded from blocking Liberty Media from acquiring more shares in the open market.”  Because plaintiffs could offer no argument, apart from their challenge to the Anti-Takeover Provisions, that the Sirius board breached its fiduciary duties, those claims were dismissed.

The Court then addressed plaintiffs’ claim that Liberty had breached fiduciary duties in connection with its post-standstill period actions to obtain majority ownership of Sirius.  Plaintiffs argued that Liberty became subject to a broad “duty of fairness” at the end of the standstill period, and was therefore required to obtain additional shares only in a transaction approved as fair by the non-Liberty members of the Sirius board.  The Court characterized plaintiff’s argument as “odd” and concluded that it failed for two reasons.  First, the claim against Liberty was time-barred because plaintiff’s real challenge was to the contractual right to make unhindered open market purchases that Liberty acquired in 2009.  The Court emphasized that Liberty had put over half a billion dollars at risk in 2009, and had at that time bargained for the right to acquire control of Sirius without board interference.

Second, even if plaintiffs’ complaint were timely, it would fail to state a claim against Liberty.  Even if Liberty had become a controlling stockholder at some point between the end of the standstill period and the time it acquired majority ownership, it breached no fiduciary duties by making additional open market purchases.  The Court hypothesized that a controlling stockholder in Liberty’s position might breach its duties by, for example, trading on non-public information to the detriment of the minority or engaging in fraud.  But the Court rejected the proposition that “someone who could be considered to own a controlling block of shares has a duty to pay a fair price to top up to a majority position.”

In dismissing the action, the Court emphasized “[t]here are many situations when corporations enter into contractual arrangements that have important implications for corporate control,” such as when a debt instrument gives a creditor a right to assume control under specific circumstances.  Exercise of such rights, the Court concluded, does not constitute a fiduciary breach.  Without allegations that Liberty did anything more than exercise contractual rights, which it obtained before it became a Sirius stockholder, plaintiffs could not state a claim for breach of fiduciary duties.

The full opinion is available here