Lehman Brothers Holdings Inc. v. Spanish Broadcasting Sys., Inc., Consol. C.A. No. 8321-VCG (Del. Ch. Feb. 25, 2014) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery held that preferred stockholders of Spanish Broadcasting System, Inc. (“SBS” or the “Company”) had acquiesced to the Company’s incurrence of additional debt while a dividend arrearage allegedly existed because the preferred stockholders knew that the Company intended to incur such debt but did not object nor otherwise assert their purported right, under a certificate of designation, to constrain the Company from incurring additional debt. Consequently, the Court granted summary judgment in favor of the Company and against the preferred stockholders on their declaratory judgment and breach of contract claims.
The Company is a Delaware corporation that owns and operates Spanish-language radio and television stations in the United States, generating most of its revenue from the sale of advertising airtime. The Company has two classes of common stock and two classes of preferred stock, only one of which, the Series B preferred stock, was at issue in the case.
According to the certificate of designation, Series B stockholders receive dividends “when, as and if declared by the Board of Directors,” accruing at an annual rate of 10.75%. These dividends accrue on a daily basis and are “payable quarterly in arrears on October 15, January 15, April 15, and July 15 of each year.” Under the certificate, a “Voting Rights Triggering Event” (a “VRTE”) is defined as any time “dividends on the outstanding Series B Preferred Stock are in arrears and unpaid . . . for four (4) consecutive quarterly dividend periods.” If such a VRTE were to occur, then, under the certificate of designation, “the number of directors constituting the Board of Directors of the Company will be adjusted to permit the holders of the majority of the then outstanding Series A Preferred Stock and Series B Preferred Stock, voting together as one class, to elect two directors.” In addition, if a VRTE were to occur, then the Company would be prohibited from incurring certain additional debt if the Company’s debt to cash-flow ratio were over 7-to-1, and, if the Company desired to incur such new debt, it must either pay its arrearages or obtain a waiver from its preferred stockholders.
From the issuance of Series B in 2004 through April 2009, the Company paid the Series B stockholders quarterly dividends. However, as a result of the financial crisis, the Company experienced liquidity issues and, in May 2009, decided to defer payment of dividends in order to preserve cash. Subsequently, the Company declared one dividend per year, payable on April 15 each year, and declined to pay dividends for the three quarters in between.
In May 2011, the Company publicly announced that it planned to purchase a Houston, Texas television station by issuing an $8 million promissory note. No Series B stockholder voiced an objection to the Company’s planned incurrence of debt at that time, and the transaction closed three months later. In January 2012, the Company publicly announced that it intended to issue $275 million of senior secured notes, paying 12.5% interest, in order to refinance existing debt that was coming due. The indenture agreement governing those notes prohibited the Company “from making more than one out of every four quarterly dividend payments to holders of Series B Preferred Stock, unless certain debt leverage ratios are satisfied, in which case [the Company] can only make two out of every four quarterly dividends.” The notes offering closed in February 2012, again without objection from any Series B stockholder.
In February 2013, plaintiff Lehman Brothers Holdings Inc., a Series B stockholder, filed suit in the Court of Chancery seeking a declaratory judgment that a VRTE occurred in July 2010 and requesting an award of damages for breach of contract based on the Company’s incurrence of additional debt in August 2011 and February 2012. In June 2013, plaintiff T. Rowe Price High Yield Fund, Inc., also a Series B stockholder, filed suit in the Court of Chancery seeking a declaration that a VRTE occurred in April 2010 and claiming damages for breach of contract and breach of the implied covenant of good faith and fair dealing based on the Company’s incurrence of additional debt. The plaintiffs asserted that four continuous quarters of dividend arrearages had triggered a VRTE under the certificate of designation; the Company countered that a VRTE had not occurred because the Company had not failed to make four consecutive quarterly cash dividend payments. The Company also asserted the affirmative defense of acquiescence (among others). The two cases were consolidated in July 2013.
On the parties’ cross-motions for summary judgment, the Court held that the doctrine of acquiescence barred the plaintiffs’ claims. The Court explained that the doctrine of acquiescence effectively works an estoppel: “where a plaintiff has remained silent with knowledge of her rights, and the defendant has knowledge of the plaintiff’s silence and relies on that silence to the defendant’s detriment, the plaintiff will be estopped from seeking protection of those rights.” The Court found that, assuming arguendo that the plaintiffs were correct that a VRTE had occurred, the plaintiffs had knowledge of such VRTE and notice that the Company intended to take on additional debt prior to its incurrence, because all of the information necessary for the plaintiffs to assess their rights was contained in publicly available documents and disclosures and “the crucial fact in relation to a VRTE—the payment (or nonpayment) of dividends—is uniquely within the interest of the [p]laintiffs as preferred stockholders with large ownership interests[.]” The plaintiffs, though, “with notice that the VRTE was in effect and of the Company’s intent to take on additional debt, did nothing.” The Court determined that the Company had relied on the plaintiffs’ silence in consummating the debt transactions. The Court reasoned that the Company knew that all relevant information regarding a VRTE and the debt transactions was available to the preferred stockholders and that no preferred stockholder had requested to fill seats on the board or had objected to the incurrence of debt as a result of such VRTE. The Company’s reliance on the plaintiffs’ silence was detrimental, because, according to the Court, had the Company known of the plaintiffs’ objection to the incurrence of additional debt, it could have chosen an alternative course, such as eschewing additional debt, seeking a consent from the preferred stockholders, or petitioning the Court for a declaratory judgment before incurring the additional debt.
Accordingly, the Court granted summary judgment in favor of the Company and against the plaintiffs.