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Liberty commenced this action against the Trustee under the Indenture, seeking injunctive relief and a declaratory judgment that the proposed Capital Splitoff would not constitute a disposition of "substantially all" of Liberty's assets in violation of the Indenture. The Court of Chancery concluded, after a trial, that the four transactions at issue should not be aggregated, and entered judgment for Liberty. The Court of Chancery concluded that the proposed splitoff was not "sufficiently connected" to the prior transactions to warrant aggregation for purposes of the Successor Obligor Provision. The court agreed with the judgment of the Court of Chancery and affirmed.Receive FREE Daily Opinion Summaries by Email
IN THE SUPREME COURT OF THE STATE OF DELAWARE
THE BANK OF NEW YORK
MELLON TRUST COMPANY,
N.A., as Trustee,
LIBERTY MEDIA CORPORATION §
and LIBERTY MEDIA LLC,
No. 284, 2011
Court Below – Court of Chancery
of the State of Delaware
C.A. No. 5702
Submitted: September 14, 2011
Decided: September 21, 2011
Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and
RIDGELY, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED.
Joel Friedlander, Esquire, and Sean M. Brennecke, Esquire, Bouchard,
Margules & Friedlander, P.A., Wilmington, Delaware, Steven D. Phol,
Esquire (argued), Timothy J. Durken, Esquire, Brown, Rudnick, LLP,
Boston, Massachusetts, Sigmund S. Wissner-Gross, Brown Rudnick LLP,
New York, New York, Mark S. Baldwin, Esquire and Stephen R. Klaffky,
Esquire, Brown, Rudnick LLP, Hartford, Connecticut, for Bank of New
York Mellon Trust Company, N.A.
Donald J. Wolfe, Jr., Esquire, Arthur L. Dent, Esquire, Michael A.
Pittenger, Esquire (argued), Brian C. Ralston, Esquire, and Matthew F.
Lintner, Esquire, Potter, Anderson & Corroon, LLP, Wilmington, Delaware,
and Frederick H. McGrath, Esquire, Richard B. Harper, Esquire and Renee
L. Wilm, Esquire, Baker Botts L.L.P., New York, New York, for Liberty
Media Corporation and Liberty Media LLC.
The plaintiffs-appellees, Liberty Media Corporation (“LMC”) and its
wholly owned subsidiary Liberty Media LLC (“Liberty Sub,” together with
LMC, “Liberty”) brought this action for declaratory and injunctive relief
against the defendant-appellant, the Bank of New York Mellon Trust
Company, N.A., in its capacity as trustee (the “Trustee”). Liberty proposes
to split off, into a new publicly traded company (“SplitCo”) the businesses,
assets, and liabilities attributed to Liberty’s Capital Group and Starz Group
(the “Capital Splitoff”). After Liberty announced the proposed splitoff of
the businesses and assets attributable to its Capital and Starz tracking stock
groups, Liberty received a letter from counsel for an anonymous bondholder.
In that letter, counsel for the bondholder stated that Liberty has
pursued a “disaggregation strategy” designed to remove substantially all of
Liberty’s assets from the corporate structure against which the bondholders
have claims, and shift those assets into the hands of Liberty’s stockholders.
Therefore, the bondholder contended that the transaction might violate the
Successor Obligor Provision in the Indenture and threatened to declare an
event of default. In response to that threat, Liberty commenced this action
against the Trustee under the Indenture, seeking injunctive relief and a
declaratory judgment that the proposed Capital Splitoff will not constitute a
disposition of “substantially all” of Liberty’s assets in violation of the
The Capital Splitoff will be Liberty’s fourth major distribution of
assets since March 2004. The Trustee argues that when aggregated with the
previous three transactions, the Capital Splitoff would violate a successor
obligor provision in an indenture dated July 7, 1999 (as amended and
supplemented, the “Indenture”) pursuant to which Liberty agreed not to
transfer substantially all of its assets unless the successor entity assumed
Liberty’s obligations under the Indenture (“Successor Obligor Provision”).
It is undisputed that, if considered in isolation, and without reference to any
prior asset distribution, the Capital Splitoff would not constitute a transfer of
substantially all of Liberty’s assets or violate the Successor Obligor
The Court of Chancery concluded, after a trial, that the four
transactions should not be aggregated, and entered judgment for Liberty.
The Court of Chancery concluded that the proposed splitoff is not
“sufficiently connected” to the prior transactions to warrant aggregation for
purposes of the Successor Obligor Provision. The Court of Chancery found
that “[e]ach of the transactions resulted from a distinct and independent
business decision based on the facts and circumstances that Liberty faced at
the time,” and that each transaction “was a distinct corporate event separated
from the others by a matter of years,” and that these transactions “were not
part of a master plan to strip Liberty’s assets out of the corporate vehicle
subject to bondholder claims.”
Having held that aggregation would be
inappropriate on the facts of this case, the Court of Chancery did not reach
Liberty’s alternative argument that, even if the identified transactions were
aggregated for purposes of the Successor Obligor Provision, they
collectively would still not constitute a transfer of “substantially all” of
In this appeal, the Trustee contends that the Court of Chancery erred
in ruling that Liberty’s prior spinoff and splitoff transactions should not be
aggregated with the Capital Splitoff for purposes of determining whether
Liberty will have transferred substantially all of its assets. Specifically, the
Trustee argues that the Court of Chancery’s “adoption of the legally
irrelevant step-transaction doctrine is not supported by the plain language of
the Indenture and is inconsistent with the Indenture’s actual language, which
forbids disposition of substantially all of Liberty’s assets through a ‘series of
transactions.’” Moreover, according to the Trustee, even if there were some
basis for the Court of Chancery to look beyond the plain language of the
Indenture, there is no evidence indicating that the parties intended to
incorporate the step-transaction doctrine into the Successor Obligor
Provision of the Indenture.
We conclude that the judgment of the Court of Chancery must be
What follows are the facts as found by the Court of Chancery in its
Liberty’s Emergence and Early Evolution
For two decades, Liberty has enjoyed a dynamic and protean
existence under the leadership of its founder and chairman, Dr. John
Malone. Liberty emerged in 1991 from Tele-Communications, Inc. (“TCI”),
then the largest cable television operator in the United States, when a threat
of federal regulation led TCI to separate its programming assets from its
TCI formed Liberty and offered its stockholders the
opportunity to exchange their TCI shares for Liberty shares. At the time, Dr.
Malone was Chairman, CEO, and a large stockholder of TCI. After the
exchange offer, Dr. Malone was also Chairman, CEO, and a large
stockholder of Liberty.
In 1994, Bell Atlantic entered into merger discussions with TCI. Bell
Atlantic insisted that Liberty’s assets be part of any acquisition. To facilitate
a transaction, TCI reacquired Liberty by merger. The discussions with Bell
Atlantic broke down, but Liberty remained part of TCI.
In 1998, Dr. Malone convinced AT&T to acquire TCI by merger at a
significant premium.1 In the transaction, both TCI and Liberty became
wholly owned subsidiaries of AT&T. The agreement with AT&T allowed
Liberty to operate autonomously, and Liberty’s assets and businesses were
attributed to a separate tracking stock issued by AT&T. Dr. Malone served
as Liberty’s Chairman.
While it was a subsidiary of AT&T, Liberty entered into the Indenture
with the Trustee. From July 7, 1999 through September 17, 2003, Liberty
issued multiple series of publicly traded debt under the Indenture, the
proceeds of which totaled approximately $13.7 billion. Liberty has since
retired or repurchased much of that debt. As of September 30, 2010, debt
securities with a total balance of approximately $4.213 billion remained
Name of Security and
8.5% Senior Debentures
4% Exchangeable Senior
Balance as of
See In re Tele-Commc’ns, Inc. S’holders Litig., 2005 WL 3642727, at *1-3 (Del. Ch.
Dec. 21, 2005).
Debentures Due 2029
8.25% Senior Debentures
3.75% Exchangeable Senior
Debentures Due 2030
3.5% Exchangeable Senior
Debentures Due 2031
Debentures Due 2031
Senior Debentures Due 2023
5.7% Senior Notes Due
$750 million (2/10/00)
$60 million (3/8/00)
The Terms of the Indenture
The Indenture includes a successor obligor provision. This provision
prohibits Liberty from selling, transferring, or otherwise disposing of
“substantially all” of its assets unless the entity to which the assets are
transferred assumes Liberty’s obligations under the Indenture (thereby
releasing Liberty from its obligations).
Section 801 of the Indenture
provides, in pertinent part:
[Liberty Sub] shall not consolidate with or merge into, or sell,
assign, transfer, lease, convey or other[wise] dispose of all or
substantially all of its assets and the properties and the assets
and properties of its Subsidiaries (taken as a whole) to, any
entity or entities (including limited liability companies) unless:
(1) the successor entity or entities . . . shall expressly
assume, by an indenture (or indentures, if at such time there is
more than one Trustee) supplemental hereto executed by the
successor Person and delivered to the Trustee, the due and
punctual payment of the principal of, any premium and interest
on and any Additional Amounts with respect to all the
Securities and the performance of every obligation in this
Indenture and the Outstanding Securities on the part of [Liberty
Sub] to be performed or observed . . . ;
(2) immediately after giving effect to such transaction
or series of transactions, no Event of Default or event which,
after notice or lapse of time, or both, would become an Event of
Default, shall have occurred and be continuing; and
(3) either [Liberty Sub] or the successor Person shall
have delivered to the Trustee an Officers’ Certificate and an
Opinion of Counsel [containing certain statements required by
Indenture § 801 (the “Successor Obligor Provision”). A failure to comply
with the obligations imposed by Article Eight constitutes an “Event of
Default.” Id. § 501.
The Indenture does not define the phrase “substantially all.” Nor does
the Indenture contain any covenants requiring Liberty to maintain a
particular credit rating, a minimum debt coverage ratio, or a minimum assetto-liability ratio.2 The Indenture does not contain any provision directly
addressing dividends and stock repurchases, which are the corporate
vehicles to effectuate a spinoff (stock dividend) and a splitoff (stock
Compare, e.g., Committee on Trust Indentures and Indenture Trustees, ABA Section of
Business Law, Model Negotiated Covenants and Related Definitions, 61 Bus. Law. 1439
(2006) (providing model covenants addressing these topics); Thomas O. McGimpsey &
Darren R. Hensley, Successor Obligor Clauses: Transferring “All or Substantially All”
Corporate Assets in Spin-Off Transactions, Colorado Lawyer 45 (Feb. 2001) (describing
different forms of covenants).
Liberty’s Continued Evolution Since the Splitoff From AT&T
In August 2001, AT&T split off Liberty to the holders of its publicly
traded Liberty tracking stock.
When Liberty re-emerged as a public
company, it held a “fruit salad” of assets, consisting mainly of minority
equity positions in public and private entities. For example, Liberty owned
single-digit-percentage stakes in large public companies such as Sprint,
Viacom, and Motorola. Liberty also owned large minority positions in
private companies such as Discovery Communications. Most of Liberty’s
assets, except for a few controlled operating businesses, did not generate any
cash flow. The value of Liberty’s holdings, which had been quite significant
during the heady days of the internet bubble (recall that the Indenture was
executed in 1999), fell significantly in 2000 and 2001 (the period leading up
to the splitoff).
After the splitoff, Dr. Malone and the rest of Liberty’s management
team set out to build value at Liberty by rationalizing its investment
portfolio. Put simply, Liberty wanted to use its minority investments to
acquire controlling stakes in mutually supporting operating businesses that
would generate cash flow. According to Dr. Malone,
it was always obvious that the direction that the company
needed to go – which was to – out of the cosmic dust, as it
were, form some gravitational units that could then pull in these
investment assets, monetize them and grow. It’s always been a
process of how do you convert from a portfolio of investments
into a series of operating businesses.
Beginning in 2001, Liberty sought to own stakes in businesses that
Liberty either controlled or saw a clear path to control. If Liberty did not
control an asset and could not identify a path to control, then Liberty
management evaluated all possible alternative uses for the asset. Over the
ensuing decade, Liberty engaged in numerous transactions in pursuit of that
overall strategy, frequently structuring its deals as swaps or exchanges to
avoid triggering taxable events.
After separating from AT&T, Liberty looked first to build a cashgenerating business in the area its management team knew best: cable
television. Having sold the nation’s largest cable provider to AT&T in
1999, Dr. Malone did not think it was feasible to make a comeback in the
U.S. Instead, Liberty sought to expand, and consolidate, its international
A series of international deals ensued. In 2001, Liberty agreed to
acquire the largest cable television business in Germany from Deutsche
Telekom. In 2002, Liberty increased its stake in UnitedGlobalCom, Inc.
(“UGC”), a cable provider active in Europe and Latin America. In 2002 and
2003, Liberty increased its stakes in Jupiter Telecommunications and Jupiter
Programming Company, two cable businesses in Japan.
But Liberty’s efforts to create an international cable business ran into
The Deutsche Telekom deal fell apart after encountering
problems with German regulators. By 2004, it was clear that creating an
international cable business would require massive capital infusions that
would need to be funded with additional debt.
determined that the most effective way to raise capital would be to move the
international assets off Liberty’s balance sheet and into a separate entity.
That new entity could raise debt on its own, and the risks of international
expansion would be borne “directly by those shareholders of Liberty Media
who chose to do so, rather than by the company at large.”
Thus, in 2004, Liberty spun off Liberty Media International, Inc.
(“LMI”), which held Liberty’s controlling interest in UGC and stakes in
other international cable companies.
Liberty also contributed to LMI
Liberty’s shares of News Corp. preferred stock, a 99.9% economic interest
in 345,000 shares of ABC Family Worldwide preferred stock, and $50
million in cash.
Liberty management believed that the LMI spinoff would best serve
both Liberty and the new entity:
Creating a separate equity security will give existing Liberty
Media shareholders and new investors the ability to concentrate
their investment in either LMI, the remaining Liberty Media
businesses, or both. We expect that this will increase the
trading value of both securities, thereby reducing the discount
in the current Liberty Media stock and creating better
currencies for both entities to use in pursuit of acquisition
activity. In addition, by their nature the LMI businesses can
support higher levels of debt, which should generate higher
The LMI spinoff was a significant transaction for Liberty. It removed
$11.79 billion in assets (at book value) from Liberty’s balance sheet,
representing 19% of Liberty’s total book value as of March 31, 2004–the
date the Trustee contends should be used for purposes of determining what
constituted “substantially all” of Liberty’s assets. At the same time, Liberty
avoided exposing itself to the massive borrowing that the international cable
If Liberty had retained the international assets and
undertaken the transactions in which LMI later engaged, Liberty today
would have an additional $21 billion in liabilities on its consolidated balance
sheet, all senior to the public debt issued under the Indenture.
Notwithstanding the risks it faced, LMI has proved successful. The
spun-off company, later renamed Liberty Global, Inc., is currently the
largest cable operator outside of the United States. In 2009, Liberty Global
reported assets (at book value) of $39.9 billion, total revenue of $11.1
billion, and operating income of $1.64 billion.
The Trustee views the LMI spinoff as the start of Liberty’s
disaggregation strategy. Commenting on the LMI spinoff in early 2005, Dr.
Malone described it as “the first shoe to drop” and a “model we want to
That’s what we continuously look for . . . opportunities to carve
out if necessary other businesses that can go off and be part of a
consolidation in their space, gain market power, improve
profitability, appropriately use debt leverage, shelter taxes, or
avoid corporate level taxes, and go on down the road in terms
of maximizing shareholder value . . . . And that continues to be
the plan today.
(Dr. Malone, testifying that Liberty’s strategy was to “[c]onsolidate on the
operating businesses, and figure out how to disaggregate the businesses
where we couldn’t find an efficient way to own, consolidate, and grow
assets, that we hadn’t been able to figure out how to do that”).
At the same time that Liberty management was attempting to develop
a cash-generating international cable business, they also were evaluating
another Liberty legacy investment: its minority stake in QVC, Inc. QVC
was and remains the dominant cable shopping channel, and Liberty
management liked QVC’s “position as a market leader in its industry, . . .
QVC’s ability to generate significant cash from operations and Liberty’s
ability to obtain access to such cash, and . . . QVC’s perceived significant
international growth opportunities.”
In September 2003, Liberty acquired control over QVC by purchasing
approximately $7.9 billion. Liberty paid $1.35 billion of the purchase price
in cash, raised by issuing additional debt under the Indenture. Liberty also
issued, directly to Comcast, $4 billion in Floating Rate Senior Notes under
the Indenture. Liberty paid the balance of the purchase price with 217.7
million shares of Liberty Series A common stock, valued at $2.555 billion.
Also during 2003 and 2004, Liberty management explored
alternatives for Discovery, a cable channel that Liberty owned in partnership
with Cox Communications and Advance/Newhouse. Although Discovery
was performing well, Liberty owned less than 50% of the equity, lacked
control, did not have a clear path to control, and was restricted by a
stockholders agreement from selling or otherwise monetizing its position.
Consistent with its strategy of increasing minority positions into
control positions, Liberty approached its partners in an effort to develop a
path to control. When these efforts failed, Liberty attempted to explore
plans for monetizing the business by selling it or taking it public. Liberty’s
partners were not interested in that alternative either.
With their preferred alternatives blocked, Dr. Malone and the Liberty
management team decided to dividend Liberty’s Discovery shares to its
stockholders, thereby giving them a direct ownership interest in Discovery.
Liberty management hoped that as a result of the distribution, Cox
Communications and Advance/Newhouse “would perhaps ultimately see the
benefit of a public vehicle for valuation and management motivation.” To
facilitate the distribution, Liberty created Discovery Holding Company,
transferred to it Liberty’s stake in Discovery, plus a small operating
company called Ascent Media and $200 million in cash, and then spun off
the new entity to Liberty’s stockholders.
The Discovery spinoff removed from Liberty’s balance sheet assets
with a book value of $5.825 billion, representing 10% of Liberty’s total
book value as of March 31, 2004. After the spinoff, Liberty’s securities lost
their investment-grade rating. Moody’s cited concern with “management’s
long-term strategic and financial vision for the company, and likely resultant
credit protection levels.” Moody’s noted that “[t]he rating could stabilize if
management evidenced both the ability and willingness to maintain or
improve the asset coverage that represents the primary source of credit
protection levels at present.”
Like LMI, Discovery prospered post-spinoff.
In 2009, Discovery
reported assets with a book value of $10.997 billion, revenues of $3.5
billion, and operating income of $1.24 billion.
The Trustee points to the Discovery spinoff as a continuation of
Liberty’s “disaggregation strategy.” In its 2004 shareholder letter, Liberty
management stated that:
[s]ince Liberty’s inception 14 years ago, our overriding
objective has been clear and consistent: to maximize the value
of our shares. Over the years, we have accomplished this by
executing three core strategies: owning businesses with
significant built-in growth potential; making timely acquisitions
that enable us to build on that growth potential and create new
business lines; and actively managing our capital structure. In
2004, we introduced a fourth strategy of disaggregating
businesses by distributing them to our shareholders. While this
technique actually reduces the value of our shares, it also
increases the wealth of our shareholders by giving them
holdings in two companies instead of one.
Dr. Malone emphasized the disaggregation strategy in other
[T]he focus at Liberty has been figuring out how to rationalize
the compliment of assets that we have, how to regain market
share in those businesses that we think have that potential and
how to avoid double or triple taxation as we attempt to exploit
the underlying values of the assets. And that’s led us kind of to
voice a philosophy right now for Liberty, which is disaggregate
in order to consolidate . . . .
The Interactive and Capital Tracking Stocks
On November 9, 2005, Liberty announced the creation of two tracking
stocks, one for Liberty’s Interactive Group and the second for Liberty’s
Capital Group. Liberty created the tracking stocks to “help the investment
and analyst communities to focus their attention on the underlying value of
[Liberty’s] assets.” At the same time, Liberty management recognized that
the trackers could serve as a first step toward future splitoffs.
Malone explained during Liberty’s third quarter 2005 earnings call:
As you know, we have spun off the international business and
organized it. We’ve spun off Discovery Holdings and in the
process of optimizing it, and so this creation of Liberty
Interactive clearly signals a desire long-term for an ultimate
separation, but it gives us the latitude to optimize taxes and take
our time in the structuring of our debt liabilities and tax
liabilities in the pendency of any ultimate spin off.
Dr. Malone noted that the creation of the trackers did not negatively
affect Liberty’s bondholders, because “during the pendency of a tracking
stock structure, there is really no change in terms of the assets that the
debtholders can look to.” The Trustee infers from this statement that Dr.
Malone knew that a splitoff would have a different–and negative–effect on
More Deal-Making and Another Tracking Stock
In late 2004, News Corporation (“News Corp.”) announced its
intention to reincorporate from Australia to Delaware. Liberty management
saw this as an opportunity to increase Liberty’s stake in News Corp. Liberty
acquired approximately 16% of News Corp.’s stock through a combination
of open-market purchases and derivatives. Dr. Malone correctly anticipated
that News Corp.’s controlling stockholders, the Murdoch family, would not
welcome Liberty’s involvement and that the Murdoch family’s desire to
address Liberty’s investment position would create opportunities for dealmaking. After two years of negotiating, Liberty agreed in late 2006 to
exchange its News Corp. stake for (i) a 38.5% interest in DirecTV, (ii) three
regional sports networks, and (iii) $550 million in cash.
Meanwhile, Liberty continued to pursue transactions on other fronts
involving both exchanges of minority positions for wholly owned assets and
outright acquisitions. In April 2007, Liberty agreed to exchange its minority
stake in CBS Corporation for ownership of a CBS local television station
and $170 million in cash. In May 2007, Liberty exchanged a portion of its
minority investment in Time Warner Inc. for ownership of the Atlanta
Braves baseball organization, Leisure Arts, Inc., and $984 million in cash.
During 2006 and 2007, Liberty acquired IDT Entertainment (later renamed
Starz Media), Provide Commerce, Inc., FUN Technologies, Inc.,
BuySeasons, Inc., and Backcountry.com, Inc. In 2008, Liberty attributed
Starz Media and other entertainment-related assets to a new tracking stock
group called the Entertainment Group. This resulted in Liberty’s assets
being divided between three tracking stock groups: the Interactive Group,
the Entertainment Group, and the Capital Group.
The News Corp. swap gave Liberty an influential position in
DirecTV. Consistent with its overall strategy, Liberty sought a path to
control. In April 2008, Liberty purchased another 78.3 million shares of
DirecTV for consideration of $1.98 billion in cash. Restrictions in the
DirecTV certificate of incorporation, however, prohibited Liberty from
acquiring more than 50% of DirecTV’s equity unless Liberty offered to
purchase 100% of the outstanding stock. To avoid triggering that provision,
Liberty and DirecTV agreed that Liberty’s equity ownership could exceed
the 50% threshold, but Liberty’s voting power would be capped at 48.5%.
As a result of DirecTV’s stock repurchase program, Liberty’s equity
ownership eventually climbed to 57%, although Liberty’s voting power
never exceeded 48.5%.
As 2008 wore on and the financial markets deteriorated, Liberty’s
management realized that financing to acquire the balance of DirecTV was
With the DirecTV charter provision otherwise blocking
Liberty’s path to control, Liberty management examined other potential
alternatives. Ultimately, Liberty announced that it would split off its interest
in DirecTV, along with certain other business, into a new entity called
Liberty Entertainment, Inc. (“LEI”). Liberty and DirecTV then negotiated a
transaction in which LEI would merge with DirecTV immediately after the
splitoff. The splitoff and merger closed on November 19, 2009.
Liberty initially planned to split off all the assets attributed to the
Technologies, Inc., Liberty Sports Holdings, LLC, GSN, LLC and WildBlue
Communications. Because Liberty management believed that DirecTV was
undervaluing Starz and WildBlue in the merger negotiations, Liberty
decided to retain those assets. Liberty management also considered the
potential effect of the splitoff on bondholders. At that time, Dr. Malone
stated that “[w]e had to retain [the] cash and economic value of Starz in
order to reassure the bondholders in Liberty that their interests were being
protected.” The Trustee cites this statement as evidence that Liberty knew
its disaggregation strategy was approaching the “substantially all” limit. Dr.
Malone and Liberty CEO Gregory Maffei testified at trial that they did not
believe Liberty was legally required to hold back Starz and cash from the
splitoff, but Liberty did so to protect itself during the height of the financial
crisis and reassure bondholders and lenders.
The LEI splitoff removed from Liberty’s balance sheet assets with a
book value of $14.2 billion, representing 23% of Liberty’s asset base as of
March 31, 2004. The splitoff also removed roughly $2.2 billion in shortterm debt that was attributable to LEI. DirecTV is now the world’s leading
provider of digital television entertainment services.
In 2009, DirecTV
reported assets with a book value of $18.26 billion, revenues of $21.57
billion, and operating profit of $2.67 billion.
Dr. Malone served as
Chairman of DirecTV until April 6, 2010.
Sirius And IAC
As the first decade of the new millennium wound down, Dr. Malone
and his team continued their deal-making. In February 2009, the ongoing
financial crisis created the opportunity to make a favorable investment in
Sirius XM Radio Inc. In return for a loan of $530 million, Liberty received
shares of Sirius XM preferred stock, convertible into a 40% common stock
interest, and a proportionate number of seats on Sirius XM’s board. Liberty
agreed to cap its stake at 50% until 2012. Sirius XM has since repaid the
loan, while Liberty continues to hold its equity stake.
In December 2010, Liberty engaged in another swap transaction.
Liberty exchanged its equity stake in InterActiveCorp (“IAC”), a company
controlled by Barry Diller, for sole ownership of IAC’s Evite.com and
Gifts.com businesses and approximately $220 million cash.
The Proposed Splitoff
In June 2010, Liberty announced the Capital Splitoff, in which Liberty
proposes to split off the businesses allocated to its Capital and Starz Groups
into SplitCo, a new public entity. SplitCo will own Starz Entertainment,
Starz Media, Liberty Sports Interactive, Inc., the Atlanta Braves, True
Position, Inc., and Liberty’s interest in Sirius XM. The assets to be split off
have a book value of $9.1 billion, representing 15% of Liberty’s total assets
as of March 2004. Dr. Malone is expected to serve as Chairman of the new
entity’s board, and Mr. Maffei is expected to serve as CEO.
After the Capital Splitoff, Liberty will hold the businesses attributed
to Liberty’s Interactive Group, consisting primarily of QVC, several ecommerce businesses (including Evite, Gifts.com, BuySeasons, and
Bodybuilding.com), and minority equity stakes in Expedia, the Home
Shopping Network (“HSN”), and Tree.com (which operates Lending Tree).
All outstanding debt securities issued by Liberty will remain obligations of
Liberty following the Capital Splitoff. Liberty’s board analyzed Liberty’s
ability to service its outstanding debt after the splitoff, including debt at the
QVC level and concluded that Liberty will have no difficulty servicing its
ISSUE ON APPEAL
The parties dispute whether Liberty will breach the Successor Obligor
Provision by disposing of substantially all its assets in a series of
transactions. It is undisputed, however, that the Capital Splitoff, standing
alone, does not constitute “substantially all” of Liberty’s assets.
threshold question is, therefore, whether the Capital Splitoff should be
aggregated with the prior spinoffs of LMI and Discovery and the splitoff of
The answer to that threshold question involves the construction of a
boilerplate successor obligor provision in an indenture governed by New
York law. That provision restricts Liberty’s ability to dispose of “all or
substantially all” of its assets unless the transferee assumes the Indenture
debt. The question presented has not been addressed by the New York
Court of Appeals, nor, to our knowledge, by any lower New York state
In the past, we have certified questions of first impression under New
York law to the New York Court of Appeals.3 In this case, certification is
not realistically possible because the parties have requested a decision within
one week of the oral argument before this Court. Consequently, as did the
Court of Chancery, we must predict what the law of New York would be on
this important question of first impression.
Standard of Review
The legal issue in this case presents a mixed question of law and fact.
The applicable standards of appellate review are well established.4 After a
trial, findings of historical fact are subject to the deferential “clearly
erroneous” standard of review.5 That deferential standard applies not only to
historical facts that are based upon credibility determinations but also to
findings of historical fact that are based on physical or documentary
evidence or inferences from other facts. Where there are two permissible
views of the evidence, the factfinder’s choice between them cannot be
Once the historical facts are established, the issue
becomes whether the trial court properly concluded that a rule of law is or is
Teachers’ Ret. Sys. of Louisiana v. PricewaterhouseCoopers LLP, 998 A.2d 280 (Del.
Hall v. State, 14 A.3d 512, 516-17 (Del. 2011).
not violated. Appellate courts review a trial court’s legal conclusions de
The Aggregation Principle
The Court of Chancery acknowledged that, as a theoretical matter, a
series of transactions can be aggregated for purposes of a “substantially all”
analysis.7 Indeed, the Successor Obligor Provision at issue recognizes that
aggregation may occur. That Provision states that Liberty can comply with
the Successor Obligor Provision only if “immediately after giving effect to
such transaction or series of transactions, no Event of Default or event
which, after notice or lapse of time, or both, would become an Event of
Default, shall have occurred and be continuing.”8 Courts applying New
York law have determined that, under appropriate circumstances, multiple
transactions can be considered together, i.e., aggregated, when deciding
whether a transaction constitutes a sale of all or substantially all of a
Id.; see also Blake v. State, 954 A.2d 315, 317-18 (quoting Guererri v. State, 922 A.2d
403, 406 (Del. 2007)).
See Ad Hoc Committee for Revision of the 1983 Model Simplified Indenture, Revised
Model Simplified Indenture, 55 Bus. Law. 1115, 1134-35, 1186-87 (2000) (“In the
context of asset disposition by transfer or lease, serious consideration must be given to
the possibility of accomplishing piecemeal, in a series of transactions, what is specifically
precluded if attempted as a single transaction.”).
Indenture § 801(2) (emphasis added).
See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1051-52 (2d
Cir. 1982) (comparing assets acquired by successor corporation to assets held by debtor
Sharon Steel Precedent
The Court of Chancery began its analysis with the Second Circuit’s
1982 decision in Sharon Steel Corp. v. Chase Manhattan Bank, N.A., which
the court characterized as “the leading decision on aggregating transactions
for purposes of a ‘substantially all’ analysis” in the context of a successor
In Sharon Steel, the Second Circuit addressed a
transaction in which a corporation, subject to a successor obligor provision
in a bond indenture, had transferred corporate assets to multiple purchasers
pursuant to a plan of liquidation. The court held that “boilerplate successor
obligor clauses do not permit assignment of the public debt to another party
in the course of a liquidation unless ‘all or substantially all’ of the assets of
the company at the time the plan of liquidation is determined upon are
transferred to a single purchaser.”10
In Sharon Steel, after consummating a series of asset sales in
furtherance of its liquidation plan, UV Industries, Inc. (“UV”) sold its
corporation one and a half years earlier, prior to two third-party asset sales, when
determining whether successor corporation acquired “substantially all” of the debtor’s
assets); In re Associated Gas & Elec. Co., 61 F. Supp. 11, 28-31 (S.D.N.Y. 1944)
(treating transfers of subsidiaries by one controlled company to a second over a course of
three years as a sale of substantially all assets where the transactions were “parts of a
single scheme”), aff’d, 149 F.2d 996 (2d Cir. 1945); U.S. Bank Nat’l Ass’n v. Angeion
Corp., 615 N.W.2d 425, 432-34 (U. Minn. Ct. App. 2000) (reversing grant of summary
judgment to debtor and finding that issues of fact existed as to whether two transactions
viewed together constituted a sale of substantially all of the issuer’s assets).
Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d at 1051.
remaining assets to Sharon Steel in November of 1979. Sharon Steel sought
to assume UV’s indenture obligations under the successor obligor provision,
arguing that it was permitted to do so without bondholder consent because
the most recent transfer to Sharon Steel constituted a sale of “all or
substantially all” of UV’s assets as measured immediately prior to the
transaction.11 Under the indenture governing UV’s debt securities, as under
the Indenture in this case, a successor corporation could assume UV’s
obligations only if UV sold “all or substantially all” of its assets in the
transaction. Certain debenture holders claimed that the assets sold to Sharon
Steel did not constitute “substantially all” of UV’s assets. Therefore, UV
accordingly had defaulted under the indenture and as a consequence, the
outstanding debt was immediately due and payable.
In Sharon Steel, the Second Circuit focused on the fact that all of the
sales were pursued to accomplish the predetermined goal of liquidating UV
under a formal plan of liquidation, even though only one asset sale had been
identified at the time the liquidation plan was adopted. Characterizing the
sales as a “piecemeal” liquidation, the Second Circuit explained that it
would be inappropriate to regard the UV/Sharon Steel sale in isolation,
Id. at 1046, 1049.
given the substance and purpose of the “overall scheme to liquidate.”12 As a
result, for purposes of determining whether “substantially all” of UV’s assets
had been transferred to Sharon Steel, thereby permitting Sharon Steel to
assume the indenture obligations, the Second Circuit held that the assets
transferred to Sharon Steel had to be measured against the totality of assets
UV owned at the inception of the plan of liquidation.13 Taking into account
all the assets UV had transferred to various buyers since the adoption of the
liquidation plan, the Second Circuit concluded that UV had not transferred
to Sharon Steel “substantially all” of its assets. Therefore, UV had violated
the successor obligor provision.14
The Sharon Steel court was careful to distinguish the “piecemeal
liquidation” at issue in that case from situations where a company disposes
of assets over time and not as part of a preconceived plan of liquidation.
Specifically, the Second Circuit rejected UV’s “literalist approach” under
which Sharon Steel necessarily acquired “all of” UV’s assets because it
purchased whatever assets were left at the time of the sale.15 In doing so, the
See id. at 1050-51.
Id. at 1051.
Id. at 1051-52.
Id. at 1049.
Second Circuit distinguished sales of assets “in the regular course of UV’s
business” from seriatim sales as part of “an overall scheme to liquidate”:16
To the extent that a decision to sell off some properties is not
part of an overall scheme to liquidate and is made in the regular
course of business it is considerably different from a plan of
piecemeal liquidation, whether or not followed by independent
and subsequent decisions to sell off the rest. A sale in the
absence of a plan to liquidate is undertaken because the
directors expect the sale to strengthen the corporation as a going
concern. . . . The fact that piecemeal sales in the regular course
of business are permitted thus does not demonstrate that
successor obligor clauses apply to piecemeal liquidations,
allowing the buyer last in time to assume the entire public
In Sharon Steel, the Second Circuit found that aggregation was
appropriate because the individual sale transactions at issue were part of a
“plan of piecemeal liquidation” and an “overall scheme to liquidate.”18
Conversely, where asset transactions are not piecemeal components of an
otherwise integrated, pre-established plan to liquidate or dispose of nearly all
assets, and where each such transaction stands on its own merits without
reference to another, courts have declined to aggregate for purposes of a
“substantially all” analysis.19
Id. at 1050.
Id. at 1050-51.
Id. at 1050.
See id. (distinguishing the “piecemeal liquidation” at issue from situations in which a
company disposes of assets over time in the regular course of its business and not as part
of a preconceived plan of liquidation); Bank of N.Y. v. Tyco Int’l Grp., S.A., 545 F. Supp.
2d 312, 320-22 (S.D.N.Y. 2008) (holding that integration doctrine of Sharon Steel did not
Sharon Steel Applied
In applying Sharon Steel to the facts of this case, the Court of
Chancery carefully assessed whether the trial evidence demonstrated that
Liberty had developed a plan or scheme to dispose of its assets piecemeal
with a goal of liquidating nearly all its assets, or removing assets from the
corporate structure to evade bondholder claims. The Court of Chancery
made a legal conclusion that there was no basis in the trial record for such a
determination and stated:
If the evidence at trial had shown, as in Sharon Steel, a plan to
engage in seriatim distributions that would remove assets from
Liberty’s corporate form and evade the bondholders’ claims,
then those otherwise separate transactions could be aggregated
to determine if the end result constituted a disposition of
substantially all of Liberty’s assets. Under those circumstances,
I would have compared Liberty’s business mix as it existed
when the plan was adopted with Liberty’s business mix as it
will exist after the Capital Splitoff. The evidence, however,
does not support such a plan.
The Court of Chancery’s legal conclusion rests on its factual finding
that aggregating the four transactions is not warranted because each
transaction was the result of a discrete, context-based decision and not as
part of an overall plan to deplete Liberty’s asset base over time. The court
apply where there was no plan to liquidate). See also Bacine v. Scharffenberger, 1984
WL 21128, at *3 (Del. Ch. Dec. 11, 1984).
Having reviewed the documentary record and listened to the
witnesses testify at trial, I find that the Capital Splitoff is not
sufficiently connected to the LMI and Discovery spinoffs or the
LEI splitoff to warrant aggregating the four transactions. Each
of the transactions resulted from a distinct and independent
business decision based on the facts and circumstances that
Liberty faced at the time. Although the transactions share the
same theme of distributing assets to Liberty’s stockholders,
they were not part of a master plan to strip Liberty’s assets out
of the corporate vehicle subject to bondholder claims. Rather,
each transaction reflected a context-driven application of the
overarching business strategy that Liberty has followed since
separating from AT&T: consolidate ownership of businesses
where Liberty can exercise control or has a clear path to
control, while exploring all possible alternatives for assets that
do not fit this profile. . . . [Liberty] has not followed a strategy
of disposing of substantially all of its assets.
The Court of Chancery could have ended its analysis with the abovedescribed application of the Sharon Steel holding to the facts of this case.
The Court of Chancery decided, however, that the Sharon Steel opinion did
not set forth a clear standard for determining when a series of transactions
should be aggregated for purposes of a “substantially all” analysis. The
Court of Chancery added a second layer of analysis, which it described as
“doctrinal hindsight,” to conclude that the Sharon Steel holding “fits within
the step-transaction framework” and proceeded to apply that analytical
framework to the facts of this case.
Step-Transaction Doctrine Applied
The Court of Chancery had previously applied the “step-transaction”
doctrine in Noddings Investment Group, Inc. v. Capstar Communications,
Inc.20 In Noddings, the court was asked to determine whether a spinoff and
merger could be considered together for purposes of an adjustment provision
of a warrant governed by New York law. The Court of Chancery analyzed
the facts under the “step-transaction” doctrine, which
treats the “steps” in a series of formally separate but related
transactions involving the transfer of property as a single
transaction, if all the steps are substantially linked. Rather than
viewing each step as an isolated incident, the steps are viewed
together as components of an overall plan.21
The step-transaction doctrine applies if the component transactions
meet one of three tests. First, under the “end result test,” the doctrine will be
invoked “if it appears that a series of separate transactions were prearranged
parts of what was a single transaction, cast from the outset to achieve the
Noddings Inv. Grp., Inc. v. Capstar Commc’ns, Inc., 1999 WL 182568 (Del. Ch. Mar.
24, 1999), aff’d 741 A.2d 16 (Del. 1999).
Id. at *6 (quoting Greene v. United States, 13 F.3d 577, 583 (2d Cir. 1994)). See also
In re Kelly, 2005 WL 3879099, at *7-8 (N.Y. Div. Tax. App. Dec. 8, 2005) (applying
step-transaction doctrine to aggregate, for tax purposes, a “series” of real estate
transactions which were in substance a single deal); Gatz v. Ponsoldt, 925 A.2d 1265,
1280 & n.31 (Del. 2007) (citing various doctrines, including step transaction, in
connection with observation that Delaware Courts should look to the substance of
transactions, rather than form); Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609,
at *9-10 (Del. Ch. Sept. 14, 2007) (applying step-transaction doctrine; treating
amendment to limited partnership agreement and subsequent merger as “part and parcel
of one integrated transaction”).
Second, under the “interdependence test,” separate
transactions will be treated as one if “the steps are so interdependent that the
legal relations created by one transaction would have been fruitless without a
completion of the series.”23 The third and “most restrictive alternative is the
binding-commitment test under which a series of transactions are combined
only if, at the time the first step is entered into, there was a binding
commitment to undertake the later steps.”24
In evaluating the trial evidence, the Court of Chancery used the “three
lenses of the step-transaction doctrine” (the binding-commitment test, the
interdependency test, and end result test) as a doctrinal tool to “bring the
picture into sharper focus” in applying aggregation principles to the facts of
this case. The court found that the binding-commitment test does not apply
because none of the transactions was contractually tied to any of the others.
It also determined that the interdependency test did not warrant aggregation
because “[e]ach of the transactions was a distinct corporate event separated
from the others by a number of years.” Each transaction “stood on its own
merits,” and “[n]one was so interdependent on another that it would have
Noddings Inv. Grp., Inc. v. Capstar Commc’ns, Inc., 1999 WL 182568 at *6 (internal
Id. (internal quotation omitted).
Id. (internal quotation omitted). See generally In re Big V Hldg. Corp., 267 B.R. 71,
92-93 (Bankr. D. Del. 2001) (describing tests).
been fruitless in isolation.” Finally, turning to the end result test, the Court
of Chancery carefully assessed whether the trial evidence in any way
suggested that Liberty had developed a plan or scheme to dispose of its
assets piecemeal with a goal of liquidating, disposing of nearly all its assets,
or removing assets from the corporate structure to evade bondholder claims.
It found no basis in the trial record for such a conclusion.
The Trustee argues that “Sharon Steel does not hold that a ‘series of
transactions’ means a step-transaction.” Moreover, the Trustee submits,
“even if Sharon Steel fits within [the step-transaction framework] it does not
follow that the Second Circuit intended to apply a step-transaction
requirement for aggregating transactions under an indenture.” The Trustee
argues that “the fact that the Second Circuit never mentioned the steptransaction doctrine compels the conclusion that it did not intend to do so.”
The Trustee also points to language in the American Bar Foundation’s
Commentaries on Model Debenture Indenture Provisions which shows that
the evolution of the Successor Obligor Provision in this case does not
incorporate the step-transaction doctrine. The Trustee notes that this Court
and others have looked to the American Bar Foundation’s Commentaries on
Model Debenture Indenture Provisions as “an aid to drafting and
construction” of common indenture language.25 Our examination of Model
Provisions and Commentary leads us to conclude that the influence of the
Sharon Steel decision on the Model provisions is more instructive and
helpful than the absence of any reference to the step-transaction doctrine.
Boilerplate Provisions Require Uniform Interpretation
Successor obligor provisions in bond indentures consist of marketfacilitating boilerplate language. Courts endeavor to apply the plain terms of
such provisions in a uniform manner to promote market stability.26 The
Court of Chancery has previously noted that “boilerplate provisions” in
indentures are “not the consequence of the relationship of particular
borrowers and lenders and do not depend upon particularized intentions of
the parties to an indenture.”27 Therefore, in interpreting boilerplate indenture
provisions, “courts will not look to the intent of the parties, but rather the
Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 397 (Del. 1996); see also NLM
Capital v. Republic of Argentina, 621 F.3d 230, 241-42 (2d Cir. 2010); The Bank of New
York v. First Millennium, Inc., 598 F. Supp. 2d 550, 565 (S.D.N.Y. 2009), aff’d, 607 F.3d
905 (2d Cir. 2010).
See Wilmington Trust Co. v. Tropicana Entm’t, LLC, 2008 WL 555914, at *6 (Del. Ch.
Feb. 29, 2008) (“it is important that language routinely . . . employed in [indentures] be
accorded a consistent and uniform construction”); see also Sharon Steel Corp. v. Chase
Manhattan Bank, N.A., 691 F.2d at 1048 (“uniformity in interpretation is important to the
efficiency of capital markets”).
San Antonio Fire & Police Pension Fund v. Amylin Pharms., Inc., 983 A.2d 304, 314
(Del. Ch. 2009) (quoting Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d at
1048), aff’d, 981 A.2d 1173 (Del. 2009).
accepted common purpose of such provisions.”28 In this case, the Court of
Chancery properly recognized the boilerplate character of the Indenture’s
Successor Obligor Provision and correctly emphasized the importance of
The Trustee responds that although the Successor Obligor Provision at
issue here is “boilerplate” (i.e., was not the subject of specific negotiation
between the parties), it is not the standard successor obligor provision
boilerplate found in any of the various iterations of the model indenture.
The Trustee and Liberty both acknowledge, however, that the “series of
transactions” language in the Indenture is the result of a specific
recommendation contained in the comments to the Model Simplified
Indenture, which counseled draftsmen to give “serious consideration” to the
risks posed by the “piecemeal” disposition of assets through “a series of
transactions.” The inclusion of the phrase “series of transactions” in the
Indenture, the Trustee argues, broadened the meaning and scope of the
Successor Obligor Provision. That argument is not persuasive.
Dennis J. Connolly & William Hao, X Marks The Spot: Contractual Interpretation of
Indenture Provisions, 17 J. Bankr. L. & Prac. 6 Art. 1, 12 (2008).
The “series of transactions” language first appeared in a comment to
the Model Simplified Indenture,29 published five months after the Sharon
Steel decision. That comment cautions that “serious consideration must be
given to the possibility of accomplishing piecemeal, in a series of
transactions, what is specifically precluded if attempted as a single
transaction.”30 Liberty argues that the comment was designed to address the
same concerns at issue in Sharon Steel. In support of that argument, it
points to the fact that the Revised Model Simplified Indenture, promulgated
in May 2000, contains the same commentary, but adds a citation to Sharon
Steel.31 Accordingly, Liberty submits, the only fair conclusion to be drawn
from the presence of “series of transactions” language in a post-Sharon Steel
successor obligor provision (such as the one at issue here) is that the
additional language is meant to underscore that a disposition of
“substantially all” assets may occur by way of either a single transaction or
an integrated series of transactions, as occurred in Sharon Steel. We agree.
Liberty’s Indenture was executed many years after the Second
Circuit’s decision in Sharon Steel. There is no evidence in the record that
See Section of Corporation, Banking and Business Law, American Bar Association,
Model Simplified Indenture, 38 Bus. Law. 741, 791 (1983).
Id. at 791 (emphasis added).
See Ad Hoc Committee for Revision of the 1983 Model Simplified Indenture, Revised
Model Simplified Indenture, 55 Bus. Law. 1115, 1186-87 (2000).
the “series” language was included for any reason other than to clarify that
the Successor Obligor Provision should be interpreted in the same manner as
the one at issue in Sharon Steel. The trial testimony established–and the
Trustee admits–that the Successor Obligor Provision was never a subject of
negotiations between the parties in the case. Had the parties to the Indenture
intended to create an asset disposition covenant with a broader scope than
the standard, boilerplate successor obligor covenant, it was incumbent upon
them to include it in a separate, negotiated covenant. As two commentators
Sharon Steel illustrates the narrow construction of
indenture provisions and the underlying concerns that inform
the interpretation of indenture provisions by the courts. It is
therefore important that negotiated provisions in an indenture
be not only explicit but also distinct from boilerplate
provisions. Modifications to common indenture provisions will
unlikely yield additional rights as courts will not look to the
intent of the parties, but rather the accepted common purpose of
In Airgas, Inc. v. Air Products and Chemicals, this Court recently noted that
practice and understanding in the real world are relevant and persuasive,
when interpreting similar language in a contractual provision.33
Dennis Connolly & William Hao, X Marks the Spot: Contractual Interpretation of
Indenture Provisions, 17 J. Bankr. L. & Prac. 6 Art. 1, 12 (2008) (emphasis added).
Airgas, Inc. v. Air Products and Chemicals, 8 A.3d 1182 (Del. 2010).
important to the efficiency of capital markets that language routinely used in
indentures be accorded a consistent and uniform construction.34
Liberty points out that at the time the Indenture was established, there
were more rigorous model provisions available that explicitly required
consideration of prior asset dispositions in determining the legal effect of a
later disposition of any substantial part of an issuer’s assets. For example,
Sample Covenant 1 of Section 10-13 in the Commentaries states:
Subject to the provisions of Article Eight, the Company
will not convey, transfer or lease, any substantial part of its
assets unless, in the opinion of the Board of Directors, such
conveyance, transfer or lease, considered together with all prior
conveyances, transfers and leases of assets of the Company,
would not materially and adversely affect the interest of the
Holders of the Debentures or the ability of the Company to
meet its obligations as they become due.35
The Liberty Indenture contains no such provision. As the Court of Chancery
also noted, there is also no covenant “requiring Liberty to maintain a
particular credit rating, a minimum debt coverage ratio, or a minimum assetto-liability ratio,” and “the Indenture does not contain any provision directly
addressing dividends and stock repurchases, which are the corporate
vehicles to effectuate a spinoff (stock dividend) and a splitoff (stock
This Court has consistently held that the rights of
See Wilmington Trust Co. v. Tropicana Entm’t, LLC, 2008 WL 555914 at *6.
American Bar Foundation, Commentaries On Model Debenture Indenture Provisions §
10-13, at 426-27 (1965).
bondholders and other creditors are fixed by contract.36 As the Court of
Chancery properly recognized, it would be inconsistent with the concept of
private ordering to expand the scope of the Successor Obligor Provision by
rewriting the Indenture contract to include by implication additional
protections for which the parties could have–but did not–provide by way of
a covenant separate and apart from the boilerplate successor obligor
New York Law
In the context of the “substantially all” analysis under a boilerplate
successor obligor provision in an indenture, and given the near absence of
any authoritative New York case law, we conclude that the principles
articulated in Sharon Steel are the proper basis for determining, under New
York law, the nature and degree of interrelationship that will warrant
aggregation of otherwise separate and individual transactions as a part of a
NACEPF, Inc. v. Ghewalla, 930 A.2d 92, 99 (Del. 2007); Revlon, Inc. v. MacAndrews
& Forbes Holding, Inc., 506 A.2d 173, 182 (Del. 1986).
See Bank of N.Y. v. Tyco Int’l Grp., S.A., 545 F. Supp. 2d at 322 (declining to infer into
successor obligor provision additional protection available to noteholders in existing
model covenants, where parties could have included such protection in indenture but did
not); see also Noddings Inv. Grp., Inc. v. Capstar Commc’ns, Inc., 1999 WL 182568, at
*4 (rejecting claim that a spin-off should be interpreted as a reorganization for purposes
of a warrant agreement based on absence of “spin-off protection” provision similar to
those found in the Model Debenture Indenture); Metro. Life Ins. Co. v. RJR Nabisco, Inc.,
716 F. Supp. 1504, 1508 (S.D.N.Y 1989) (“There being no express covenant . . . this
Court will not imply a covenant to prevent the recent LBO and thereby create an
indenture term that, while bargained for in other contexts, was not bargained for here, and
was not even within the mutual contemplation of the parties.”).
“series.” In Sharon Steel, the Second Circuit determined that aggregation is
appropriate only when a series of transactions are part of a “plan of
piecemeal liquidation” and “an overall scheme to liquidate” and not where
each transaction stands on its own merits without reference to the others.
The Court of Chancery carefully considered and applied Sharon Steel
to the facts before it, and concluded that the Capital Splitoff “is not
sufficiently connected to the LMI and Discovery spinoffs or the
[Entertainment] splitoff to warrant aggregating the four transactions.” The
Court of Chancery held:
Following a consistent business strategy and deploying
signature M&A tactics does not transmogrify seven years of
discrete, context-specific business decisions into a single
Liberty has engaged in acquisitions and
divestitures as part of the regular course of its business. Liberty
did not engage in an “overall scheme” to sell substantially all of
In support of that finding and legal conclusion–and without regard to the
step-transaction doctrine–the Court of Chancery cited only the Sharon Steel
decision as authority for its holding.
We conclude it is unnecessary to reach or decide whether the steptransaction doctrine and its three component tests would be adopted by the
New York Court of Appeals as definitive New York law to determine
Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d at 1050.
whether to aggregate a series of transactions in a “substantially all” analysis.
Given the Court of Chancery’s factual findings, even if the Court of
Chancery had not utilized “[t]he three lenses of the step-transaction
doctrine” as a doctrinal tool to “bring the picture into sharper focus,” the
legal conclusion in this case would have been the same under our
independent reading of Sharon Steel.
The Trustee concedes that the Capital Splitoff, viewed in isolation,
does not constitute a disposition of substantially all of Liberty’s assets. On
the facts of this case, the Court of Chancery properly held that aggregation is
not appropriate. Accordingly, Liberty was entitled to a declaration that the
Capital Splitoff does not violate the Successor Obligor Provision in the
The judgment of the Court of Chancery is affirmed.