Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Chancery Dismisses Stockholder Claims As Barred By Prior Court-Approved Settlement Agreement, Res Judicata And The Business Judgment Rule<br >  
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  • Delaware Chancery Dismisses Stockholder Claims As Barred By Prior Court-Approved Settlement Agreement, Res Judicata And The Business Judgment Rule
     

    12/05/2016
    On November 23, 2016, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed derivative claims asserted by GAMCO Asset Management (“GAMCO”), stockholder of Clear Channel Outdoor Holdings Inc. (“CCOH”), against CCOH and its board, CCOH’s controlling stockholder, iHeartCommunications Inc. (“iHC”) and iHC’s parent company, iHeartMedia Inc. (“iHM”), and two private equity funds with a combined controlling interest in iHM and iHC.  GAMCO Asset Management Inc. v. iHeartMedia Inc., C.A. No. 12312-VCS (Del. Ch. Nov. 23, 2016).  The Court found that plaintiff’s claims were released by an earlier settlement of related issues, barred by res judicata, and that the business judgment rule protected the CCOH board and controlling stockholders from GAMCO’s claims for breach of fiduciary duty.

    GAMCO asserted claims based on certain intercompany financial agreements between CCOH and iHC, which were negotiated in 2005 and heavily favored iHC, as well as asset sales and a debt issuance by CCOH in 2015, followed by a pro rata dividend to all CCOH stockholders.  The intercompany agreements gave rise to a derivative suit by CCOH stockholders in 2012, which was settled in an agreement that Vice Chancellor Slights described as anticipating that iHC’s financial condition might worsen and giving CCOH additional protections under the intercompany agreements if iHC met certain triggers.  The Court held that the claims related to the intercompany agreements were barred by the earlier settlement, and additionally by the doctrine of res judicata.  In so holding, the Court rejected GAMCO’s arguments that its claims derived from post-settlement events, finding that the claims shared a common nucleus of operative facts with the prior litigation and were released by the settlement. 

    As to the debt issuance and the asset sales, plaintiff argued that even though the transactions were arm’s-length market transactions and the resulting dividends were distributed pro rata to all stockholders, they should nevertheless be reviewed for entire fairness because iHC and iHM — as controlling stockholders — received a “unique benefit” not shared with other stockholders.  Specifically, plaintiff asserted that iHC and iHM caused CCOH to enter into the transactions to generate fast cash that, under the intercompany agreements, would be passed to iHC and iHM.  The Court found that these allegations did not fit the “very narrow circumstances” where Delaware courts have recognized that “a controlling stockholder’s immediate need for liquidity could constitute a disabling conflict of interest irrespective of pro rata treatment” of stockholders.  Finding that the challenged transactions did not confer anything on the controlling stockholder to the exclusion of minority, the Court applied the business judgment rule and dismissed the breach of duty claims based on the debt issuance and asset sales. 

    The GAMCO holding underscores that the business judgment rule is the “default standard of review” in Delaware, even where a challenged transaction is undertaken at the behest of a controlling stockholder to address the controller’s liquidity needs and ultimately benefits the controller.  Absent allegations that the price or process was so flawed that the challenged transaction deprived the minority stockholders of value they would have otherwise received, the business judgment rule applies.

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