In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Del. Ch. Apr. 25, 2014) (Parsons, V.C.)
In this memorandum opinion regarding the judicial dissolution of a Delaware LLC, the Court of Chancery, ordered the sale of the company in a private, English-style auction, as opposed to a public auction, in order to maximize the value of the company’s members’ ownership interests.
The parties to this action agreed that Interstate General Media Holdings, LLC (the “Company”) was deadlocked, that judicial dissolution was necessary, and that the Company should be sold at an auction. The sole issue before the Court concerned the manner in which the auction would be effectuated.
General American Holdings, Inc. (the “Petitioner”) argued that the auction should be structured as an English-style, open outcry auction in which only the Company’s members and the Company’s largest labor union (Newspaper Guild of Greater Philadelphia, Local 38010, AFL-CIO, CLC (the “Guild”)) would be eligible to participate. The Petitioner, the owner of a 54% interest in the Company and one of the Company’s two managing members, argued that its proposed auction structure was consistent with the Company’s LLC agreement and was most likely to maximize the value of the members’ LLC interests. Intertrust GCN, LP (“Intertrust”) and H.F. “Gerry” Lenfest (together with Intertrust, the “Respondents”) argued that the Company should be sold at a public auction in which each bidder submits a single, sealed bid. Intertrust, which owned over 26% interest in the Company and served as the Company’s other managing member, and Lenfest, the Chairman of the Company’s Board of Directors and holder of a 16% interest in the Company, claimed that the Company’s LLC agreement should not control in resolving the disputed issue, and that their public auction proposal would maximize value for the Company’s members.
First, the Court rejected Petitioner’s argument that the Company’s LLC agreement should influence which proposal the Court adopts. The Court reasoned that while the LLC agreement contemplated the possibility of judicial dissolution, it did not proscribe the manner in which the Company would be dissolved in such event. The Court recognized that Delaware courts have considered other provisions in an entity’s governing documents to resolve disputes concerning dissolution mechanics. However, the Court noted that in those cases the governing documents explicitly addressed the issue before the court. Here, the LLC agreement did not address the appropriate auction process, and thus the Court retained the discretion to structure the sale process.
Next, the Court concluded that a private, as opposed to a public, auction would maximize the value of the Company’s members’ ownership interests. In reaching this conclusion, the Court rejected Respondents’ argument that a public auction would attract a greater number of “serious bidders” which, in turn, would increase the Company’s sale price. The Court reasoned that, despite significant public attention that the Company was up for sale, Respondents were unable to identify any potential third party bidders that would have been interested in participating in a public auction of the Company. The Court determined that this lack of interest was due, in large part, to the Company’s unfavorable valuation relative to the auction’s minimum bid. This is underscored by the fact that Guild (alongside several potential financial backers) initially expressed an interest in purchasing the Company but backed out once it saw the Company’s financials. The Court also found that serious bidders would be unlikely to emerge due to the “as is, where is” sale terms. Additionally, the Court determined that because the ongoing dispute between Petitioner and Respondents continued to adversely affect the Company’s value, the expediency and lower costs of a private auction weigh in favor of precluding the public from participating in the auction.
Finally, the Court found that an English-style, open outcry auction, in contrast to a single, sealed bid auction, was most appropriate in this case. The Court reasoned that: (i) the parties had equal access to the Company’s key information and employees; (ii) nothing in the record suggested the Petitioner and Respondents had widely divergent perspectives regarding the Company’s value; (iii) the parties, eachhaving a sizeable ownership interest in the Company, would be considered buyers and sellers in the auction and, therefore, would have an incentive to continue bidding beyond the price it was willing to pay for the Company; (iv) both parties desired to continue running the business; (v) neither party owned another business that they could combine with the Company to realize synergies or other financial benefits; and (vi) nothing in the record suggested that either side had a material advantage over the other in its ability to obtain financing and win an auction on that basis (as opposed to bidding the maximum value for the Company).