Justia.com Opinion Summary: Plaintiffs, limited partners of Cencom Cable Income Partnership, L.P. ("Partnership"), sued defendants over the appraisal and sale of nine cable systems. In this post-trial memorandum opinion, the court addressed not only the import of the disclosures that a certain law firm, which had been retained to assure that plaintiffs' rights would be protected, had been retained to assure that the process would be "fair" to plaintiffs, but also plaintiffs' other challenges, including primarily whether the general partner manipulated to its benefit the process by which the partnership assets were valued and sold and whether approval by the limited partners of the sales process, which established a price and provided for interest on that amount following a date certain until distribution of the sales proceeds, acted to deprive plaintiffs of the right to any quarterly distributions following the start of the period during which interest would be paid. The court held that the appraisal and sale process did not deny plaintiffs the benefit of their bargain. Under the circumstances, it was fair and, to the extent that certain obligations were not precisely met, plaintiffs were not damaged. Accordingly, the court held that defendants were entitled to the entry of judgment in their favor and the dismissal of the action.
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EFiled: Jun 6 2011 10:58AM EDT
Transaction ID 37968250
Case No. 14634-VCN
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CENCOM CABLE INCOME
PARTNERS, L.P. LITIGATION
:
:
Consolidated
C.A. No. 14634-VCN
MEMORANDUM OPINION
Date Submitted: February 11, 2011
Date Decided: June 3, 2011
Revised: June 6, 2011
Pamela S. Tikellis, Esquire and Scott M. Tucker, Esquire of Chimicles & Tikellis
LLP, Wilmington, Delaware, and Lawrence P. Kolker, Esquire and Robert
Abrams, Esquire of Wolf Haldenstein Adler Freeman & Herz LLP, New York,
New York, Attorneys for Plaintiffs.
Daniel A. Dreisbach, Esquire of Richards, Layton & Finger, P.A., Wilmington,
Delaware, and Stephen B. Higgins, Esquire and Mark Mattingly, Esquire of
Thompson Coburn LLP, St. Louis, Missouri, Attorneys for Defendants Cencom
Properties Inc., CCI Holdings, Inc., Charter Communications Entertainment I, LP,
Charter Communications II, LP, Charter Investments, Inc. and Charter
Communications Properties Inc.
S. Mark Hurd, Esquire and Kevin M. Coen, Esquire of Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, Delaware, and John Reding, Esquire and Edward Han,
Esquire of Paul, Hastings, Janofsky & Walker LLP, San Francisco, California,
Attorneys for Defendants Howard L. Wood, Barry L. Babcock, Jerald L. Kent, and
Theodore W. Browne, II.
NOBLE, Vice Chancellor
We all have bad days. The unknown drafter of a disclosure statement
explaining to limited partners the process for winding up a partnership had one of
those days. A limited partnership, in accordance with the terms of its governing
document, was coming to its end. A process had been prescribed for establishing
the sale price of its assets. A law firm was retained to assure that the limited
partners’ rights under the limited partnership agreement would be protected. The
drafter of the disclosure statement, for reasons that will never be known, wrote that
the law firm was engaged to assure the limited partners that the dissolution process
would be “fair.” The Plaintiffs have latched on to that phrase and argue, in
essence, that the use of the word “fair” imbues their challenge with all of the
principles of “entire fairness,” as that concept has evolved in our jurisprudence.
Ultimately, that is an untenable stretch: the substantive rights of the limited
partners are determined by reference to the provisions of the limited partnership
agreement, and one sentence in a disclosure statement cannot change those rights.
Perhaps more importantly, no reasonable limited partner would have read that
sentence and accepted that her rights would be amplified in such fashion.
In this post-trial memorandum opinion, the Court addresses not only the
import of the disclosure that the law firm had been retained to assure that the
process would be “fair” to the limited partners, but also Plaintiffs’ other
challenges, including primarily: (1) whether the general partner manipulated to its
1
benefit the process by which the partnership assets were valued and sold and
(2) whether approval by the limited partners of the sales process which established
a price and provided for interest on that amount following a date certain until
distribution of the sales proceeds acted to deprive the limited partners of the right
to any quarterly distributions following the start of the period during which interest
would be paid.
I. THE FACTS1
A. Parties
Cencom Cable Income Partnership, L.P. (“CCIP” or the “Partnership”) is a
Delaware limited partnership that was formed in July 1986 to acquire and operate
existing cable television systems as a “multiple system operator” or “MSO.”2 The
investment objectives of CCIP were (1) to generate quarterly cash distribution for
its limited partner; (2) to obtain capital appreciation and the value of its holdings;
and (3) to generate depreciation and other tax deductions.3 At all relevant times,
there were 149,204 units of the Partnership outstanding.4 The Plaintiffs were
limited partners of the Partnership (the “Limited Partners”) during the events that
resulted in these proceedings.
1
Although many of the Court’s factual findings can be found under this heading, some factual
findings are made in later sections of this memorandum opinion.
2
Joint Pretrial Order (“JPTO”) ¶¶ 1, 4.
3
Id. at ¶ 6.
4
Id. at ¶ 7. The initial value of each unit was $1000. Id.
2
The Partnership’s general partner and manager, Defendant Cencom
Properties, Inc. (the “General Partner”), is a Delaware corporation.5 At all relevant
times,
the
General
Partner’s
sole
shareholder
was
Defendant
Charter
Communications, Inc. (“Charter”), also a Delaware corporation.6
Defendants Howard L. Wood (“Wood”), Barry L. Babcock (“Babcock”),
Jerald L. Kent (“Kent”), and Theodore W. Browne (“Browne”) were officers of the
General Partner from 1986 until shortly after the General Partner was sold to
Hallmark in November in 1991.7 Wood, Babcock, and Kent later co-founded
Charter and they, as well as Browne, were officers of Charter at all relevant times.8
Charter purchased the General Partner interests from Hallmark in 1994.9
At all relevant times, Defendants Charter Communications II, L.P. (“CCII”)
and Charter Communications Entertainment I, L.P. (“CCEI”) were Delaware
limited partnerships, and Defendant Charter Communications Properties, Inc.
(“CCP Inc.”) was a Delaware corporation.
CCII, CCEI, and CCP Inc. were
affiliates of the General Partner and are, collectively, the “Purchasing Affiliates.”10
5
JPTO ¶ 1.
Id. at ¶ 2.
7
Id. at ¶ 3.
8
Id.
9
Id.
10
Id. at ¶ 5.
6
3
B. Background
Between 1986 and 1988, the Partnership purchased nine cable systems (the
“Systems”) for $147 million.11 The Systems were located in suburban (Maryville,
Illinois), rural (Clarksville, Tennessee; Hopkinsville, Kentucky; and Tryon, North
Carolina) and military (Fort Riley, Kansas; Camp Lejeune, North Carolina; Fort
Gordon, Georgia; Fort Hood, Texas; and Fort Carson, Colorado) settings.12 The
Partnership’s Amended and Restated Partnership Agreement (the “Partnership
Agreement”) provided for the expiration of the Partnership on September 30, 1994,
and that after that date, some or all of the Partnership’s assets could be sold to the
General Partner or its affiliates.13
1. Expiration of the Partnership’s term and appraisal of the Systems
As the Expiration Date approached, the General Partner, in preparation for
selling the Partnership’s assets, initiated an “Appraisal Process” that was required
and defined by the Partnership Agreement.14 The Appraisal Process specified that
two independent, nationally recognized experts (one to be selected by the
American Arbitration Association (“AAA”) and one by the General Partner) would
11
JX 1, the “Disclosure Statement,” at P0016; JPTO ¶ 8.
JPTO ¶ 8; Trial Tr. (Fineberg) at 161-63.
13
JX 9, the “Partnership Agreement,” §§ 2.4, 4.9.
14
Trial Tr. (Kent) 395-96; Partnership Agreement §§ 1, 4.9.
12
4
appraise the Partnership’s assets and that any sale of the assets would be subject to
the consent of holders of a majority of the limited partnership units.15
As it began the Appraisal Process, the General Partner retained the law firm
Husch & Eppenburger (“Husch”), which sent a letter to the Limited Partners
explaining that it had undertaken a limited engagement to represent the Limited
Partnership “in connection with the dissolution of the Partnership pursuant to the
terms of the Partnership Agreement.”16
The letter reported that Husch had
coordinated the efforts of the AAA in its selection of one of the independent
appraisers, and that it “had reviewed and [would] continue to review compliance
by the General Partner with the terms and provisions of the Partnership Agreement
as they relate to the right of the limited partners in the dissolution of the
Partnership.”17
The AAA selected Melvin Fineberg (“Fineberg”), of Fineberg Consulting
Service as one independent appraiser, and the General Partner selected Daniels &
Associates (“Daniels”) as the other.18 Fineberg and Daniels determined the value
each of the Systems individually and then the fair market value of all the Systems
in the aggregate.19
They initially appraised the value of the Systems as of
15
Partnership Agreement §§ 1, 4.9.
Disclosure Statement at P0024; JX 10, Oct. 14, 1994 Letter to Limited Partners of CCIP from
E. Wayne Farmer, Esq. of Husch.
17
JX 10.
18
Disclosure Statement at P0026.
19
Trial Tr. (Fineberg) 160.
16
5
September 30, 1994, and then updated the appraisal to assess their fair market
value at $201 million as of February 28, 1995.20
The investment bank Kidder, Peabody & Co., Inc. (“Kidder”), one of the
lead underwriters of CCIP’s original offering, retained Kagan Media Appraisal,
Inc. (“Kagan”) to perform a third appraisal of the Cable Systems; this appraisal
was outside the Appraisal Process. Kagan appraised the fair market value of the
Systems at $210.30 million as of March 31, 1995.21
2. The Sale Transaction
The General Partner and the Purchasing Affiliates entered an “Asset
Purchase Agreement” under which the Systems were to be sold to the Purchasing
Affiliates.22 The General Partner solicited the Limited Partners’ consent to the
transaction through the Disclosure Statement, dated October 3, 1995.23
It
explained that the sale was to be deemed effective as of July 1, 1995 (the
“Effective Date”), but that the transaction was expected to close, following the
vote of the Limited Partners and receipt of required regulatory approvals, in midJanuary 1996 (the “Consummation Date”).24
20
JPTO ¶¶ 24-25; Disclosure Statement at P0086 (“Fineberg Appraisal Report”); id. at P0143
(“Daniels Appraisal Report”).
21
JPTO ¶¶ 23, 26; Disclosure Statement at P0032; id. at P0161 (“Kagan Appraisal Report”).
22
Disclosure Statement at P0002-03.
23
Id.
24
Id. at P0002-03.
6
The Disclosure Statement informed the Limited Partners that the General
Partner had set the purchase price for the Systems at $211.05 million (the
“Purchase Price”), which represented a premium of 5% over the fair market value
of the Systems as determined by Fineberg and Daniels pursuant to the Appraisal
Process and a much smaller premium over Kagan’s appraisal price.25 It further
explained that the General Partner had considered the following factors, in
descending order of importance, when it determined the Purchase Price: (i) the
results of the Appraisal Process and Kagan’s appraisal; (ii) the expected benefits of
the transaction to the Purchasing Affiliates; (iii) the expected effects of possible
deregulation of the cable television market and recent regulatory changes that had
depressed that market; (iv) capital expenditures of $3.71 million made by the
Partnership since completion of the Appraisal Process; and (v) informal
discussions between the General Partner and investment bankers with experience
in the industry.26 It also explained that the General Partner believed that the
proposed transaction was fair to the Limited Partners and that it had retained Husch
“in order to assure that the Appraisal Process and the Sale Transaction would be
25
Id. at P0002. The Purchase Price also represents a 0.3566% premium over the value of the
systems as appraised by Kagan.
26
Id. at P0011.
7
fair to the Limited Partners and to protect the rights of the Limited Partners in
connection therewith.”27
The Disclosure Statement explained that the Limited Partners would receive
approximately $132,250,000 of the Purchase Price plus interest on that amount at
the rate of 5.25% per annum for the period from the Effective Date through the
Consummation Date.28 Thus, according to the Disclosure Statement, a limited
partner who had invested $1000 in the Partnership in 1986 would receive
approximately $1705 (cumulative) if the sale closed in mid-January 1996: $886 in
net sale proceeds, $26 in interest, and $793 in distributions paid from 1986 through
August 31, 1995.29 The Disclosure Statement explained that, as of the Effective
Date, the “Systems will be operated for the account of the purchasing affiliates
(rather than the Partnership) and no further quarterly distributions will be made in
respect of the [Limited Partners’ units] (other than the distribution with respect to
the second quarter of 1995, which was made on August 29, 1995.)”30
Attached to the Disclosure Statement were copies of the three appraisal
reports31 and the form of legal opinion of Husch explaining its view that the
27
Id. at P0024-25.
Id. at P0002. This figure represents the Purchase Price minus $74.3 million of debt and $4.5
million in accrued expenses that were outstanding as of the Effective Date. Id. The specified
interest rate was the composite rate applicable to six month certificates of deposit as of June 30,
1995, as quoted in the Wall Street Journal. Id.
29
Id.
30
Id. at P0003. See also id. at P0005, 22.
31
Id. at P0084-158.
28
8
General Partner had complied with the written requirements of the Partnership
Agreement pertaining to the transaction, subject to the limitation that it had not
“independently verified the accuracy, completeness or fairness of the statements
contained in the Disclosure Statement.”32
On November 1, 1995, the General Partner sent a supplemental Disclosure
Statement that informed the limited partners of this lawsuit, which had been filed
on October 20, 1995.33 A second supplemental Disclosure Statement, sent on
December 18, 1995, stated that the General Partner would receive a payout from
the Purchase Price that was approximately one percent higher than had been
reported to the Limited Partners and provided the Limited Partners with an
opportunity to change their vote regarding the transaction.34
By voting on the transaction, Limited Partners acknowledged that:
the undersigned Limited Partner has reviewed the Disclosure
Materials; acknowledged that the term of the Partnership has expired
and that the General Partner . . . is therefore proceeding with the
liquidation of the Partnership’s assets in accordance with [the
Partnership Agreement] . . . pursuant to the Sale Transaction
described
more
fully
in
the
Disclosure
Materials.35
32
Id. at P0221 (“Husch Opinion Letter”).
Defs.’ Answering Post-Tr. Br. (“AB”) at 9 n.7; JX 3.
34
JX 8.
35
Disclosure Statement at P0008 (the “Consent Form”).
33
9
Voting on the sale concluded on January 8, 1996, with nearly 60% of outstanding
units, and 83% of the units voted, approving the transaction.36 The sale closed on
March 29, 1996.37
On or about April 15, 1996, the Limited Partners received $805.22 per Unit
as the initial distribution of the Sale Transaction proceeds, which represented $869
plus interest of $34.22 earned from June 30, 1995, through March 29, 1996, less
$98 held back for contingencies; the final distributions, of $50 and $47.08 were
made on December 11, 1996, and December 28, 1998, respectively.38
II. CONTENTIONS
The Plaintiffs assert three claims:39
1.
The Defendants breached their voluntarily assumed duty and their
representation to the Limited Partners that Husch would assure the “fairness” of
the Sale Transaction.
2.
The General Partner breached the Partnership Agreement by
terminating the Limited Partners’ priority distributions from and after September
1995, some seven months before the termination of the Partnership that ended their
36
JX 51, 1995 10-K, at 15-16.
Id.; JPTO ¶ 18. Interest payments to the Limited Partners exceeded $5.1 million.
38
JPTO ¶¶ 30-32.
39
See JPTO at 6-9. These claims survived the Defendants’ efforts to extract themselves from
these proceedings through summary judgment. See In re Cencom Cable P’rs, LP Litig.
(“Cencom IV”), 2008 WL 5050624 (Del. Ch. Nov. 26, 2008). A fourth claim—that certain cash
flow projections used by the appraisers should have been disclosed to the Limited Partners—was
not pursued at trial. Some refocused claims have appeared in Plaintiffs’ post-trial briefing.
37
10
rights to priority participation.
Because the Partnership Agreement was not
amended, the intervening interest payments to the Limited Partners could not
replace those priority rights.
3.
The Defendants breached both the Partnership Agreement and their
fiduciary duties by driving the valuation process to an appraisal of the cable
Systems individually without properly including the synergistic benefits resulting
from an aggregation of the business entities. In addition, they engaged in other
conduct that manipulated the sale price to the detriment of the Limited Partners.
III. ANALYSIS
A. The Role of Husch
The Disclosure Statement that induced the Limited Partners to approve the
Sale Transaction informed them:
The General Partner believes that substantial and effective
procedures were followed to ensure the fairness of the transaction.
Despite the fact that the Partnership Agreement did not require it to do
so, the General Partner retained [Husch] to act as special outside legal
counsel on behalf of the Limited Partners in connection with the Sale
Transaction. . . . The General Partner retained [Husch] in order to
assure that the Appraisal Process and the Sale Transaction would be
fair to the Limited Partners and to protect the rights of the Limited
Partners in connection therewith. [Husch] was instructed to oversee
compliance by the Partnership and the General Partner with the terms
and provisions of the Partnership Agreement relating to the
Partnership’s dissolution and the Appraisal Process. [Husch] also
assisted the AAA in the selection of the second appraiser, reviewed
the General Partner’s compliance with the terms of the Partnership
Agreement relating to the rights of the Limited Partners and
monitored and participated in the preparation of this Disclosure
11
Statement (including by reviewing relevant documents and
participating in certain meetings and telephone calls relating to the
Disclosure Statement).40
The Plaintiffs focus on that sentence which reads: “The General Partner
retained [Husch] in order to assure that the Appraisal Process and the Sale
Transaction would be fair to the Limited Partners and to protect the rights of the
Limited Partners in connection therewith.” This sentence suggests the need for
two related inquiries. First: whether “a reasonably prudent Limited Partner [would
be induced] to conclude that Husch would opine on (and thereby, ‘assure’) the
fairness of the Sale Transaction.”41 This inquiry focuses on whether an actionable
breach of the duty of candor occurred. Second: whether it would have been
reasonable for a limited partner to infer from these words in the Disclosure
Statement that the rights of the Limited Partners were being expanded by assuring
that the Sale Transaction—and subsequent distribution of assets—would be “fair”
in some sense different from their rights as established under the terms of the
Partnership Agreement.
In assessing the sufficiency of a disclosure, a court must examine the “total
mix” of information made available to the, in this instance, limited partners.42 The
sentences following the one upon which Plaintiffs have focused itemize several
40
Disclosure Statement at P0024-25.
Cencom IV, 2008 WL 5050624, at *4.
42
See, e.g., Brinckerhoff v. Tex. E. Prds. Pipeline Co., 2008 WL 4991281, at *6 (Del. Ch.
Nov. 25, 2008).
41
12
specific procedural tasks that Husch had committed to carry out. These include
overseeing compliance with the terms of the Partnership Agreement, with specific
reference to the Partnership’s dissolution and the appraisal process. Also, Husch
was to work with the AAA in the selection of the second appraiser. Thus, the tasks
which are described are, although professional, serve primarily a ministerial or
compliance function.
Moreover, the Husch opinion supporting the Sale
Transaction is explicit in its description of what Husch, in fact, undertook:
We have acted as special counsel for the Limited Partners . . . in
connection with (i) the selection process whereby the American
Arbitration Association has selected an appraiser, which appraiser,
along with the appraiser selected by [Cencom], valued the
Partnership, and (ii) the compliance by the General Partner with the
terms and provisions of the Partnership Agreement . . . as they relate
to the rights of the Limited Partners in the dissolution process of the
Partnership.43
Thus, upon reasonable reading of the words chosen to describe Husch’s role, it
becomes apparent that a reasonable Limited Partner would have understood that
Husch had undertaken an effort to assure that the Limited Partners received that
which they contracted for through the Partnership Agreement.
Moreover, how a “fairness” notion would, or should ever, be imposed upon
an express contractual relationship, evidenced by the Partnership Agreement, is
unclear. Presumably, carrying out the obligations owed to the Limited Partners, as
measured by the Partnership Agreement, would be, within that context, fair. It
43
Husch Opinion Letter at P0221.
13
seems as if the Plaintiffs seek to import from Delaware corporate jurisprudence
that notion of “entire fairness.” The mere use of the word “fair,” however, does
not implicate those principles to override the terms of the contractual relationship,
at least, where there is nothing inherently or fundamentally “unfair” about the
transaction.
In addition, as set forth in the Disclosure Statement, the assets of the
Partnership were, as contemplated when the Partnership was formed, going to be
sold.44 A process had been established for that sale, including the possibility of a
sale to interested or conflicted parties. That an independent law firm would be
retained to provide comfort to the effect that the procedures established in the
Partnership Agreement were followed makes much commercial sense. Although
not required by the Partnership Agreement, the retention of a firm, such as Husch,
to serve that purpose benefited the Limited Partners by providing them a more
substantial basis for accepting that their rights under a detailed partnership
agreement would be protected. There is, however, no basis from which anyone
could reasonably infer that somehow their financial rights, or financial
expectations, were being increased as a result of Husch’s role.
In short, the
disclosure regarding Husch’s role was not inaccurate: Husch adequately performed
the role that it undertook to perform if, as will be addressed in Part III (C) of this
44
Disclosure Statement at P0016.
14
Memorandum Opinion, the requirements of the Partnership Agreement for the Sale
Transaction, the Appraisal Process, and, perhaps more generally, the dissolution
effort were satisfied.
B. Termination of Priority Distributions and the Payment of Interest
July 1, 1995, was selected as the Effective Date for the Sale Transaction.
The Consummation Date was expected to occur in January 1996; regulatory and
financing issues extended that until March 1996. In the interim, the Limited
Partners were paid interest at the rate—which no one has suggested was
unreasonable—of 5.25% per annum on the net sale price.
The Partnership
Agreement, however, provided for the payment of quarterly priority distributions
until the termination of the partnership’s interest in its operating assets and its
dissolution. Those priority payments—for periods after July 1, 1995—were not
made.45
This set of circumstances raises two questions.
First: “whether the
reasonably prudent limited partner asked to approve the Sale Transaction would
have understood that approval was tantamount to an amendment of the Partnership
Agreement authorizing termination of priority distributions.”46 Second: whether
some provision of the Partnership Agreement or some equitable principle
45
The priority payment for the quarter ending June 1995 was made in August 1995 after the
Effective Date. JPTO ¶ 17.
46
Cencom IV, 2008 WL 5050624, at *4.
15
prevented the use of the effective and closing dates with the gap bridged by interest
payments instead of the priority distributions that would have otherwise accrued up
until the Consummation Date.
A reasonably prudent Limited Partner, when she approved the Sale
Transaction, would have understood that she would not receive any more priority
distributions but, instead, would receive interest until the transaction closed. The
Disclosure Statement’s discussion of these aspects of the Sale Transaction was
clear and unambiguous:
The sale will be deemed to have been effected as of July 1, 1995.
Accordingly, from and after July 1, 1995, the Systems will be
operated for the account of the purchasers (rather than the Partnership)
and no further quarterly distributions will be made in respect of the LP
Units . . . .47
If the limited partners approve the proposed sale, commencing July 1,
1995, through the date the sale is consummated, the proceeds to be
distributed to the limited partners [net of certain expenses] will earn
interest at the rate of 5.25% per annum . . . . The limited partners will
not receive any future quarterly distributions other than the
distribution with respect to the second quarter, which was paid in
August 1995.48
The approval of the limited partners of the Sale Transaction will
include the limited partners’ agreement and approval that,
notwithstanding the Consummation Date, the sale will be deemed to
have been effected as of July 1, 1995. Accordingly, from and after
July 1, 1995, the systems will be operated for the account of the
47
48
Disclosure Statement, at P0003.
Id. at P0005.
16
Purchasing Affiliates (rather than the Partnership) and no further
quarterly distributions will be made in respect of the LP Units . . . .49
In sum, the Limited Partners are charged with knowledge that their approval
of the Sale Transaction would effectively eliminate their rights to quarterly priority
payments and would substitute interest payments. When they approved the Sale
Transaction, they demonstrated their agreement with that approach for selling the
assets of the Partnership as part of the inevitable dissolution process.
The Partnership continued to own the Systems after the July Effective Date.
Under the Partnership Agreement, the limited partners were to receive quarterly
priority distributions until the sale of the Partnership’s assets and its termination.
The Plaintiffs point out that the Partnership Agreement was never formally
amended, either by approval of the Sale Transaction or otherwise. From that
observation, they argue that they remain entitled to quarterly distributions for the
roughly nine months between the Effective Date and the Consummation Date.
Moreover, they claim the right to interest payments—as compensation for the time
value of the purchase price—in addition to those quarterly distributions. In other
words, according to the Plaintiffs, the interest payments may not be taken as an
offset against quarterly distributions to which they were otherwise entitled.
49
Id. at P0012. Moreover, the only plaintiff who testified at trial, Stanton Barnes, acknowledged
as much: “Q. Was it—was it your understanding that the quarterly priority distributions would
cease? A. Yeah, I think it was. Yeah, I think that’s stated in the materials.” Trial Tr. (Barnes)
at 16.
17
The Court previously observed, in denying the parties’ cross motions for
summary judgment, that the Partnership Agreement “provides no authority to
terminate the priority distributions before the termination of the Partnership,”
which only occurred after the Sale Transaction closed, rather than upon the
Effective Date, and, citing Santa Fe, that the Court could “not now comfortably
conclude that [the Court knows] that the Limited Partners did ‘consent’ to the
termination of their priority distributions as that term is defined in the Partnership
Agreement,” by approving the Sale Transaction.50
Although this language
provides support for the Plaintiff’s position, the Court was acting under the
constraints of Court of Chancery Rule 56 when it expressed those reservations.51
The Court, now acting in its role as fact-finder, addresses these issues with the
benefit of the complete trial record before it.
Two principal reasons coalesce and call for the rejection of the Plaintiffs’
claim to quarterly distribution payments in addition to the interest payments that
they did receive. First, the Court can now conclude that the Limited Partners were
fully informed that, if they approved the Sale Transaction, quarterly distributions
would cease as of the Effective Date and that interest would be paid from the
50
In re Cencom Cable Income Partners, L.P. Litig. (“Cencom II”), 2000 WL 640676, at *5-*6
(Del. Ch. May 5, 2000) (citing In re Santa Fe Pacific Shareholders Litig., 669 A.2d 59 (Del.
1995)) (emphasis in original).
51
Court of Chancery Rule 56(h) was not adopted until 2005, some five years after Cencom II
was issued. Thus, the Court did not treat the cross-motions for summary judgment as a
“stipulation for decision on the merits based on the record submitted with the motions.” Ct. Ch.
R. 56(h).
18
Effective Date until the Consummation Date.52 These and other terms of the Sale
Transaction were fairly and accurately described in the Disclosure Statement.53
Thus, the Limited Partners’ vote to approve the Sale Transaction, including the
payment of interest and the cessation of quarterly disbursements that were
contingent upon that approval, was both fully informed and uncoerced.54
Second, even if the Partnership Agreement did require the payment of
quarterly distributions to the Limited Partners after the Effective Date, the interest
payments that the Limited Partners received were a reasonable substitute for the
quarterly distributions: indeed, they were more than the amounts that would have
52
See e.g. Trial Tr. (Barnes) 16-17; see also Consent Form (indicating that by voting on the Sale
Transaction, Limited Partners had reviewed the terms of the deal as described in the Disclosure
Statement).
53
See Disclosure Statement at P0003, P0012 (“The approval by the limited partners of the
proposed sale will include the limited partners’ agreement and approval that, notwithstanding the
Consummation Date, the sale will be deemed to have been effective as of July 1, 1995.
Accordingly, from and after July 1, 1995 . . . no further quarterly distributions will be made in
respect of the LP units . . . .”); id. at P0005 (“If the limited partners approve the proposed sale,
commencing July 1, 1995 through the date the sale is consummated, the proceeds to be
distributed to the limited partners . . . will earn interest at the rate of 5.25% per annum , the
composite rate at June 30, 1995 for six-month certificates of deposit, as published in the Wall
Street Journal. The limited partners will not receive any future quarterly distributions other than
with respect to the second quarter, which was paid in August 1995.”).
54
This conclusion has aspects both of acquiescence—the informed Limited Partners accepted a
transaction structured this way—and waiver—unambiguous (given the clarity of the disclosures
here) relinquishment of a known right to quarterly payments. See, e.g., Tristate Courier &
Carriage, Inc. v. Berryman, 2004 WL 835886, at *9 n.123 (Del. Ch. Apr. 15, 2004).
By contrast, the approval of the Sale Transaction did not amend the Partnership Agreement,
as such. Under Section 10.2(A) of the Partnership Agreement, “no amendment to this
Agreement may . . . . (2) . . . alter the Interest of any Partner in Net Profits, Net Losses or Cash
Distributions . . . without the approval of each affected Partner . . . .” In this instance, certain
Limited Partners voted against the Sale Transaction. Thus, the Sale Transaction could not have
modified the terms of the Partnership Agreement to eliminate quarterly distributions. That, of
course, would not necessarily preclude structuring the sale as it was.
19
been received as quarterly distributions.55 The Plaintiffs argue that the interest
payments cannot stand in for the quarterly distributions because both parties’
experts agreed that the interest payment represented payment for the “time value of
money.” This argument ultimately fails. If the Limited Partners retained the right
to receive quarterly distributions after the Effective Date—that is, if the Limited
Partners’ rights to cash distributions were to be unaffected by the Sale Transaction
until the termination of the Partnership—then the rationale for paying interest on
the value of their investments during that time would disappear because they then
would have continued to benefit from the primary ongoing attribute of
ownership—the right to quarterly distributions.56
55
This consequence of the change from quarterly distributions to interest was recognized in
Cencom IV, 2008 WL 5050624, at *6 & n.37 (observing that the interest payments totaled almost
$580,000 more than what priority distributions would have been). The Limited Partners received
$5,102,313 in interest payments pursuant to the Sale Transaction. JPTO ¶ 19. The Plaintiffs’
expert, Thaw, calculated that $4,522,508 should have been distributed to the Limited Partners
during the three quarters following the Effective Date. Trial Tr. (Thaw) 88. Thaw reached this
figure using actual projections of capital expenditures. Id. He later reached a higher number by
“normalizing” projected capital expenditures to conform to historical levels (id. at 88-89), but the
Court finds there is no basis for substituting such historical data for the best estimate of
expenditures that would have been required in the rapidly changing industry. That increased
capital expenditures will be necessary is supported by, for example, the need to increase the
number of channels that could be served. See note 77, infra.
56
The better answer view is that the Limited Partners approved the Sale Transaction knowing
that that approval would result in (1) the cessation of quarterly distributions and (2) the payment
of interest on their investments during the pendency of the Deal. They accepted the interest
payments, and, having done so, may not now demand the quarterly distributions they bargained
away.
20
Page 21 revised 6/6/11
Thus, even if the structuring of the Sale Transaction with its Effective Date
and Consummation Date somehow transgressed the Partnership Agreement, the
Limited Partners were not damaged.
In sum, there was nothing wrongful or inequitable about paying the Limited
Partners interest in lieu of quarterly priority distributions between the Effective
Date and the Consummation Date. Moreover, the approach employed in the Sale
Transaction caused no cognizable damage to the Limited Partners.57
C. Manipulating the Appraisal Process
The Partnership Agreement anticipated—and allowed for—the possibility
that the General Partner would be the buyer of the Systems, or any smaller number
of them. Two appraisers were to be selected; they were each to perform valuations
in accordance with standard appraisal techniques; they were to confer in an effort
to agree on a purchase price.
General Partner.
One appraiser—Daniels—was selected by the
The other—Fineberg—was selected by the AAA, as the
designated neutral. Both appraisers were well-qualified and experienced in the
57
Alternative means might have been employed to allow for an early actual sale date, with the
cash funding to come later. Those alternatives would have carried their own complications. For
example, one could envision a sale by the Partnership of the Systems with a note as evidence of
the future payment obligation; Section 4.9(C) of the Partnership Agreement, however, required
that “[a]ll sales of Partnership Assets must be for cash except with the Consent of the Limited
Partners.” Given that requirement to seek Consent, as well as the credit risks that would have
been associated with such an approach, the structure that was ultimately chosen for the Sale
Transaction was commercially reasonable.
21
cable business. They did their work and conferred and came to a sale price of $201
million for the Systems.
For reasons that are not totally clear, the investment bankers arranging the
Sale Transaction had yet another appraisal performed—by Kagan, another wellqualified and experienced firm. Kagan came to a higher number, $210.3 million.
The purchasers added 5% to the Daniels-Fineberg appraisal, and reached a price
slightly higher than Kagan’s valuation—$211.05 million.
The process—at a distance—seems fair.
Qualified, independent,
experienced appraisers were retained. Two worked out a number before the third
came and reprised the appraisal effort, and that led to a larger purchase price.
The Plaintiffs, however, assert that the Appraisal Process was “manipulated”
to the detriment of the Limited Partners. There are some troubling and inconsistent
aspects of the process, but, ultimately, the process was consistent with the terms of
the Partnership Agreement and the appraisal efforts were, in addition, reasonable
and fair. Indeed, the Defendants have shown the numbers to be reasonable.58 A
review of Plaintiffs’ complaints follows.
58
The better way of imposing the burden in this matter is that the Plaintiffs must prove a breach
of the Partnership Agreement. The Court, to reduce doubt, especially in light of the fairness
obligations assumed by Husch, will treat the burden as resting with the Defendants for the
purposes of challenges to the pricing process.
Identifying the responsible party or parties, if the Plaintiffs should prove that they have been
the victims of wrongful conduct, is a question that, given the outcome of these proceedings, the
Court need not resolve. The contractual obligations, based on the Partnership Agreement, are
those of the General Partner. The responsibility of the Individual Defendants for the acts of the
22
The Plaintiffs focus their challenge on how (or, perhaps more accurately,
whether) synergies that would enhance the value of all nine of the Systems
collectively, as opposed to individual system valuations, were captured by the
Appraisal Process. This raises at least four related questions: (1) Were the Systems
appraised individually or collectively? (2) If so, would that had been a matter for
the professional judgment of the appraisers? (3) Were the synergistic benefits of
multiple Systems already part of the financial information upon which the
appraisers relied?
(4) Given the significant distances between most of the
individual Systems and the fact that the Systems served three markedly different
cable markets, what value, if any, should have been separately ascribed to the
synergistic effects when considering the Systems collectively?
The Partnership Agreement specified the “Appraisal Process” to be followed
if the General Partner (or an affiliate) purchased any of the Systems. The two
appraisers were to follow “standard appraisal techniques” to determine “fair
market value.”59
The Plaintiffs agree that the appraisers followed standard
techniques—they used income and market methodologies. Indeed, but for the
General Partner is not as clear as perhaps it should be. Moreover, the Plaintiffs have spent much
of their time criticizing the work performed by Husch. Husch, of course, is not a defendant in
this proceeding, and it is one thing for the Disclosure Statement to describe why Husch was
retained, but it is difficult to read the Disclosure Statement as guaranteeing (or that the Individual
Defendants were somehow assuming liability for) the work that would be done by Husch.
59
Partnership Agreement § 1.
23
debate about synergistic effects, the Plaintiffs’ expert, Mark Thaw, did not
materially disagree with their efforts to value the Systems.60
The evidence that Daniels and Fineberg did not consider synergies is scant.
Thaw infers that they may not have considered synergies because no discussion of
synergies appears in their reports.
Indeed, there is no express discussion of
synergies and certainly no specific quantification attributed by Daniels or Fineberg
to synergistic effects.
The Systems, however, were centrally managed, if by an entity not as large
as Charter had become by 1994, at least from 1988 when the Partnership purchased
the last of the Systems. By 1991, when the General Partner’s interests were sold to
Hallmark, the Partnership had grown, through acquisitions and internal growth, to
serve approximately 550,000 subscribers.61 According to Kent, both before and
after that sale (at least until 1992), the Systems were centrally managed by Cencom
Cable Associates, Inc. (“CCA”) an entity then affiliated with the General Partner.62
It is undisputed that the Systems were centrally managed by Charter, which Wood,
60
That Daniels and Fineberg reached a different valuation from Kagan’s valuation does not, as
Plaintiffs argue, indicate that any of these appraisers used non-standard appraisal techniques. As
explained by the Defendants’ expert, Kane, “the decision whether to value [multiple Systems] in
the aggregate or individual really lies with the appraiser.” Trial Tr. (Kane) 354.
61
Trial Tr. (Kent) 382.
62
Id. at 382, 384, 397 (“[I]nstead of nine heads of human resources, we had one that handled the
entire function for [CCA].”).
24
Babcock, and Kent had founded in early 1993, after Charter acquired the General
Partner’s interests and the Systems from Hallmark in 1994.63
In exchange for these centrally managed services, the General Partner
(regardless of the entity holding the General Partner’s interests) charged a 5%
management fee.64
Benefits accruing from economies of scale in terms of centralized
management, purchasing and programming power, and other administrative and
operational support were passed on to the individual Systems.65
Thus, the
synergies were, at least to some extent, “baked in” to the financial statements and,
thus, were accounted for in the valuation process.66
That said, there were
geographic and market limitations on the synergies that could have been achieved.
Although two of the Systems (Hopkinsville, Kentucky and Clarksville, Tennessee)
were within twenty miles of each other, the rest of the Systems ranged from eastern
63
See Pls.’ Post-Trial Br. at 26; Trial Tr. (Fineberg) 197; JPTO ¶ 3. The Plaintiffs highlight the
fact that the Systems were managed by Charter only after 1994; they seem to argue that the
systems were not centrally managed by any entity before this date. Both Fineberg and Kane
testified that it was unlikely that the individual systems could have been as profitable as they
were (before 1994) if they had not been operated as part of an MSO. Trial Tr. (Fineberg) 181;
id. at (Kane) 358.
64
Trial Tr. (Kent) 398.
65
Through centralized management by CCA, the Systems, for example, achieved buying power
greater than the Systems could have individually obtained, resulting in, among other benefits,
“some of the cheapest truck costs in the industry.” Id. at 397-98; see also supra note 62. Thus,
whether they were managed as a group of nine or as part of a much larger MSO, the Systems
received synergistic benefits from central management throughout most of the Partnership’s
existence.
66
Id. at 356; id. (Kane) at 356-57.
25
North Carolina (Camp Lejeune) to the Rocky Mountains (Fort Carson,
Colorado).67
Fineberg, who performed his appraisal a decade-and-a-half before he
testified, recalled that he did consider synergies, both through the impact of the
savings attributed to consolidated operations that were reflected on the Systems’
individual financial statements and in his use of guideline companies for his
market analysis.68 Fineberg did not consider the 5% management fee charged by
the General Partner when valuing the Systems, apparently because the
management fee was not charged directly to the individual Systems and did not
appear on the Systems’ books.69 Thus, the Systems were valued on the basis of
their cash flows, including the “baked-in” synergistic savings they experienced
under CCA’s and Charter’s management, without charging each of the Systems
with the management fee.70
Thaw, the Plaintiffs’ expert, was engaged to analyze Fineberg’s and Daniels’
appraisal reports; he neither performed his own appraisal nor reviewed the
appraisers’ work papers.71 He opined that a three-to-five percent savings should
67
Id. (Kent) at 399.
Daniels stated that its appraisal was on an operating group basis. Daniels Appraisal Report at
P0158.
69
Id. (Kent) at 360.
70
Fineberg’s omission of the management fee may have resulted in a higher than accurate cash
flow analysis. That, of course, would have benefited—not harmed—the Limited Partners.
71
Id. (Thaw) at 96-97.
68
26
have been expressly attributable to the synergistic benefits of operating the
Systems together, as contrasted with an effort to value each of the Systems
individually.
These savings would have fallen into the “bottom line,” thus
resulting in a significantly higher valuation of the Systems.72 The basis for Thaw’s
projection of synergistic savings, however, was subjective or intuitive.73 Although
qualified to express his opinion, Thaw, when compared to the other appraisers
involved in this matter, seems to have had substantially less experience in the cable
industry.74
He was not able to provide a further explanation as to how he
calculated the potential synergistic savings. Moreover, he did not appear to give
sufficient weight to the limitations arising out of the geographical distances
separating the Systems, or the fact that some, if not all, of the Systems’ synergies
were already reflected in the financial statements.
The Plaintiffs argue that the General Partner and Husch are responsible for
the appraisal debate because they instructed Daniels and Fineberg to value each of
the Systems individually, thereby reducing or eliminating the synergistic benefits.
Husch did not require the appraisers to value the Systems only on an individual
72
Id. at 114.
See id. at 76-77 (“So I said, ‘you know what, I’m a conservative guy, CPA. Three to five
percent will be something that I think is reasonably achievable.’”).
74
Id. at 94; id. (Fineberg) at 139-41; id. (Kane) at 345-46.
73
27
basis. Instead, Husch told them to “value each cable system individually, and they
also needed to value the entire assets of the partnership as a whole.”75
Fineberg testified—and the Court accepts his recollection—that the decision
to value the Systems individually was his decision (along with that of one of his
colleagues). Because the Systems operated in different cable markets, the specific
upsides and downsides of those separate markets should have been assessed
separately.76
Defendants sponsored another appraiser at trial—Kane.
He credibly
explained the reasons for valuing the Systems on an individual basis, with an
emphasis on the separate capital needs and geographical separation.77 He also
75
Trial Tr. (Johnston) 288-89. Because Husch read the Partnership Agreement as giving the
General Partner the right to purchase one, some, or all of the Systems, it did ask Daniels and
Fineberg for an individual valuation, as well as an aggregate value.
76
The Systems serve three discrete markets, each with a different quality of subscriber: suburban
(Maryville), rural (Clarksville, Hopkinsville, and Tryon), and military (Camp Lejeune, Fort
Carson, Fort Gordon, Fort Hood, and Fort Riley). For example, military subscribers were
considered less valuable due to the risk of base closures and redeployments. Trial Tr. (Kane) at
350-51.
Daniels acknowledged that, in accordance with the “Procedure Letter,” that it conducted its
appraisal at the operating group level, i.e., one of the separate Systems, and that there might be a
limited number of strategic buyers who might pay more because of the opportunity to acquire a
larger number of subscribers in a single transaction or because of economies of scale. Daniels
Appraisal Report at P0158. Although this suggests that means were available to have justified a
somewhat higher cash flow multiple, the scope of any such increase and the likelihood that it
could be realized are, at best, speculative. Moreover, it may be worth repeating that the Daniels
valuation was increased by approximately 5% before the sale price was established.
It is worth emphasizing that simply because the Systems were each valued individually does
not mean that the synergistic benefits of being part of the collection of Systems, or a larger entity
as such, were ignored. As set forth above, synergistic benefits were already reflected in the
financial statements.
77
Id. (Kane) 354-55; id. at 351 (explaining that in 1994-1995, almost all of the Systems ran at
330 megahertz, allowing them to offer only twenty-eight to thirty-seven channels to subscribers.
28
explained that synergistic benefits were “baked in” to the individual Systems’
financial statements and that Fineberg and Daniels had accounted for those
synergies, as demonstrated by the size of the Systems’ operating margins that were
reported in their appraisals.78 In short, Thaw’s speculative—although not without
some support—inference as to a failure to incorporate synergistic benefits cannot
overcome the bulk of credible evidence that the individual appraisals fairly
captured synergistic benefits and were not driven or manipulated by the
Defendants (or Husch) in that regard. Instead, capable and independent appraisers
exercised their reasoned and experienced judgment. That is what the Limited
Partners agreed to in the Partnership; that is what they were entitled to under the
Partnership Agreement; and that is what they received. More specifically, Husch
satisfied the terms of its engagement, as they were reasonably disclosed to the
Limited Partners, by assuring that the Sale Transaction was fair to the Limited
Partners when measured against the most applicable metric: the Partnership
Agreement.
The Plaintiffs have tendered other challenges to the Appraisal Process.
The industry standard was then 450 megahertz, which made offering eighty channels feasible).
Further, Daniels Appraisal Report, explaining why Daniels valued the Systems individually and
then aggregated the values, emphasized that the “critical characteristics of the Systems are key to
determining their respective values; however, they vary significantly between the Systems.”
Daniels Appraisal Report at P0145, P0158.
78
Trial Tr. (Kane) 356-60.
29
After Fineberg and Daniels agreed on an appropriate price for the Systems,
the underwriters providing the financing for the acquisition sought yet another
appraisal—this one by Kagan—who appraised the Systems on an aggregate basis
and arrived at a price that was roughly $9.3 million higher than the FinebergDaniels valuation.79
The reasons given for this additional effort include
recognition that the cable industry was going through a favorable period, other
timing issues, and that Congress might alter the regulatory landscape in a positive
way.80 One is tempted to go beyond the record and surmise that the underwriters
were concerned that use of the number reached by Fineberg and Daniels would not
draw enough support from the Limited Partners to approve the Sale Transaction or
would result in litigation. The price paid to the Limited Partners was above
Kagan’s higher appraisal.
The Plaintiffs argue the Kagan was improperly
pressured by the General Partner during its appraisal efforts. This claim fails for a
lack of proof with respect to the appraisal that generated the valuation used to
support the Sale Transaction. Moreover, expressing views that diverge from those
of the appraiser does not necessarily equate with undue or improper pressure.
The Plaintiffs also criticize the use of February 28, 1995, for the “as of” date
for the Fineberg and Daniels appraisals.
The Sale Transaction would not be
submitted to the Limited Partners for another eight months, and it would be
79
80
Kagan Appraisal Report at P0164.
Id. at P0196.
30
roughly a year before the transaction closed. This timing decision occurred during
a time of growth in the cable industry.81 At the bottom of Plaintiffs’ claim is the
suggestion that the Defendants chose the February date in an effort to forestall
further appreciation in the Systems’ value. The Defendants offer an adequate and
plausible explanation, which the Court accepts.
The appraisal reports were
completed in May 1995;82 at that point, the last monthly financials that could be
used were those completed for February 1995. The use of later financial reports
simply would have pushed the sale process further down the road.
One technical challenge, brought by the Plaintiffs, to the work of the
appraisers involved accounting for capital expenditures that were to be made after
the valuation date.
The credible explanation for that adjustment lies in the
projection of future cash flows that were made possible by those projected capital
expenditures. To the extent that projected increases in cash flow are directly
attributable to future capital expenditures, then those capital expenditures may, in
the opinion of the appraiser, and perhaps, must be factored into the valuation
process.83
81
See, e.g., Kagan Appraisal Report at P0194.
Fineberg Appraisal Report at P0084.
83
The Plaintiffs also argue that the Defendants inflated the capital expenditures that were
subtracted from Kagan’s appraised value of the Partnership. The evidence that these estimated
future expenditures were inflated is lacking, and because they were ultimately paid for by the
purchasing affiliates (Trial Tr. (Kent) 454), they were appropriated subtracted by Kagan as part
of his discounted cash flow analysis.
82
31
Finally, the Plaintiffs argue that the 5% premium (over the Fineberg-Daniels
valuation) that the Limited Partners received was as “sham” because it did not
compensate the Limited Partners for the failure to value the Systems in the
aggregate or Defendants’ other manipulations of the sale price.84 Because the
Court rejects the underlying claims, it finds that they do not provide a basis for
considering the premium to be a “sham.”
Regardless, the Sale Transaction,
including the sale price, were approved by a fully informed majority of Limited
Partners.
In sum, the appraisal and sale process did not deny the Limited Partners the
benefit of their bargain. Under the circumstances, it was fair and, to the extent the
Purchasing Affiliates, the General Partner, or Husch may have deviated from
precisely meeting their obligations, the Limited Partners were not damaged.
IV. CONCLUSION
For the foregoing reasons, the Defendants are entitled to the entry of
judgment in their favor and the dismissal of this action. An implementing order,
also requiring the parties to bear their own costs, will be entered.
84
Pls.’ Post-Trial Tr. Br. at 35-38. Because the Court rejects the underlying claims, it finds that
they do not provide a basis for considering the premium to be a “sham.” Regardless, the Sale
Transaction, including the sales price, were approved by a fully informed majority of Limited
Partners.
32
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