B&L Cellular ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
B&L CELLULAR, B&R CELLULAR, CELLULAR PLUS )
OF WATERLOO, INC., INNER-AD, INC., J&J CELCOM, )
DENNIS P. SHEAHAN, KENNETH L. RAMSEY, and )
LOWELL E. FERGUSON, )
)
Plaintiffs, )
)
v. ) C.A. No. 7628-VCL
)
USCOC OF GREATER IOWA, LLC, as successor in )
interest to United States Cellular Operating Company of )
Waterloo, and UNITED STATES CELLULAR )
CORPORATION, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: December 5, 2014
Date Decided: December 8, 2014
Ronald A. Brown, Jr., Marcus E. Montejo, PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, DE; Attorneys for Plaintiffs B&L Cellular, B&R Cellular, Cellular Plus of
Waterloo, Inc., Inner-Ad, Inc., J&J Celcom, Dennis P. Sheahan, Kenneth L. Ramsey, and
Lowell E. Ferguson.
Gregory P. Williams, Lisa A. Schmidt, Thomas A. Uebler, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, DE; Attorneys for Defendants USCOC of Greater Iowa,
LLC and United States Cellular Corporation.
LASTER, Vice Chancellor.
The defendants used their majority control over a partnership to sell its assets to a
related party. Upon closing, the partnership dissolved, and its interest holders received
their pro rata share of the sale price. The plaintiffs proved at trial that the transaction was
not entirely fair to the minority. This decision awards them their pro rata share of the
difference between fair value and the price the partnership received.
I. FACTUAL BACKGROUND
Trial took place on September 22, 2014. The following facts were proven by a
preponderance of the evidence.
A. The Partnership And U.S. Cellular
In 1986, Waterloo/Cedar Falls CellTelCo Partnership (the “Partnership”) received
a license from the Federal Communications Commission (“FCC”) to operate a wireless
network in the Waterloo/Cedar Falls, Iowa Metropolitan Statistical Area (the “Waterloo
Market”). The Partnership is a general partnership operating under the laws of the District
of Columbia. The Partnership was governed by the Amended and Restated
Waterloo/Cedar Falls Celltelco Partnership General Partnership Agreement dated
November 16, 1990 (the “Partnership Agreement”).
Defendant United States Cellular Corporation (“U.S. Cellular”) is a publicly
traded corporation that provides wireless communication services. In 1987, U.S. Cellular
began acquiring interests in the Partnership through an indirect wholly owned subsidiary,
defendant USCOC of Greater Iowa, LLC (“U.S. Cellular Sub”). U.S. Cellular Sub
eventually acquired a 93.0329% interest in the Partnership. The remaining 6.9671%
interest was held by the plaintiffs.
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The Partnership offered cellular service to the public under the U.S. Cellular
brand. In addition to its FCC license, the Partnership owned a network of cellular towers
and other equipment that was used to operate a wireless communications network in the
Waterloo Market. The Partnership had no employees of its own; it contracted with U.S.
Cellular to operate its business and provide a variety other support services including
human resources, legal, marketing, customer service, information systems, network
engineering, accounting, management, and strategic planning.
B. The Asset Sale
On August 5, 2010, U.S. Cellular gave notice to the plaintiffs that the Partnership
was calling a special meeting on August 30. The notice stated that U.S. Cellular would
exercise its voting rights at the meeting to cause the Partnership to sell all of its assets to a
related party. After that, the Partnership would liquidate, and the partners would receive
their pro rata share of the cash paid by the related party for the Partnership’s assets (the
“Transaction”). U.S. Cellular provided the plaintiffs with a report from Bond & Pecaro, a
valuation firm, which appraised the Partnership’s assets at $68,221,500. U.S. Cellular
stated that it would acquire the Partnership’s assets for that price.
The plaintiffs objected to the Transaction. Although U.S. Cellular responded to
their objections, it did not change the terms. At a special meeting on August 30, 2010,
U.S. Cellular voted its interest in favor of the Transaction. The plaintiffs voted against it.
The Transaction closed on September 1.
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II. LEGAL ANALYSIS
The plaintiffs advanced three claims at trial. First, they proved that U.S. Cellular
Sub technically breached the Partnership Agreement by sharing confidential information
belonging to the Partnership with Bond & Pecaro, without formal authorization, but they
suffered only nominal damages from this breach. Second, they argued in their pre-trial
briefs that that U.S. Cellular Sub breached the Partnership Agreement by competing with
the Partnership, but they waived that claim by not presenting evidence on it at trial. Third,
they proved that the defendants breached their fiduciary duties by approving a self-
dealing transaction that was not entirely fair to the Partnership. The plaintiffs suffered
damages in the amount of $2,095,058.
C. Breach Of The Confidentiality Provision
The plaintiffs claimed that the defendants violated Section 4.15(b) of the
Partnership Agreement when they gave Bond & Pecaro access to information for use in
appraising the value of the Partnership’s assets. Section 4.15(b) provides that confidential
information about the Partnership will “not to be disclosed to third persons except to the
extent approved by the Partners by Majority Vote.” JX 13. The defendants never obtained
a majority vote, although U.S. Cellular easily could have done so.
“The elements for a claim of breach of contract under D.C. law [which governs the
Partnership Agreement] are: (1) a valid contract between the parties; (2) an obligation or
duty arising out of the contract; (3) a breach of that duty; and (4) damages caused by
breach.” Millennium Square Residential Ass'n v. 2200 M St. LLC, 952 F. Supp. 2d 234,
247 (D.D.C. 2013) (internal quotation marks omitted). The parties do not dispute that the
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Partnership Agreement was a valid contract giving rise to an obligation not to share
certain Partnership information.
The defendants claim that they did not breach the prohibition on sharing
confidential information because the provision was aimed at “third parties that could
harm the Partnership competitively,” not an advisor such as Bond & Pecaro. Dkt. 49 at
12. “Unless there is ambiguity, Delaware courts interpret contract terms according to
their plain, ordinary meaning.” Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385
(Del. 2012). Where parties intend for confidential information to be available to financial
advisors, the contract typically references financial advisors explicitly. See Richard
Charnov & Helen Curtis, Confidentiality Agreements: A Very Close Look (Part 1 with
Sample Provisions), Prac. Law., August 2010, at 46. The Partnership Agreement did not
contain any carve-ins or carve-outs. Bond & Pecaro was a “third person” within the
meaning of Section 4.15(b), so defendants breached the Partnership Agreement by
providing Bond & Pecaro with confidential information.
The plaintiffs sustained only nominal damages from defendants’ breach. Nominal
damages are appropriate where the plaintiff has not shown proof of actual injury. Henson
v. Prue, 810 A.2d 912, 916 (D.C. 2002). U.S. Cellular could have used its 93.0329%
interest in the Partnership to approve sharing information with Bond & Pecaro. There is
no evidence that the plaintiffs would have been able to alter the terms of the Transaction
if they had learned that U.S. Cellular had engaged Bond & Pecaro to value the
Partnership at an earlier date. The defendants’ breach therefore did not cause the
plaintiffs quantifiable damages.
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D. Usurpation Of Corporate Opportunity
In pre-trial briefing, the plaintiffs argued that the defendants usurped a corporate
opportunity by acquiring another broadband wireless license in the Waterloo Market
through King Street Wireless, L.P., and they proposed to amend their complaint to add
such a claim. The plaintiffs never amended the complaint, and they did not present
evidence in support of a corporate opportunity claim at trial. The corporate opportunity
claim is waived.
E. Breach Of Fiduciary Duty
The plaintiffs proved at trial that the defendants breached their fiduciary duties by
approving a self-dealing transaction that was not entirely fair to the Partnership. The
District of Columbia has adopted the Uniform Partnership Act, see D.C. Code § 29-101
et. seq., which provides that partners owe fiduciary duties of care and loyalty to the
partnership and to one another. Id. § 29-604.07(a). The description of the duty of loyalty
owed by a partner under District of Columbia law is virtually identical to the description
of the duty of loyalty owed by a partner under Delaware law. Compare D.C. Code § 29-
604.07(b), with 6 Del. C. § 15-404(b). This is unsurprising because both statutes are
modeled on the Uniform Partnership Act.
Like Delaware, the District of Columbia uses the business judgment rule as the
default standard of review for fiduciary decisions. See, e.g., Armenian Assembly of Am.,
Inc. v. Cafesjian, 772 F. Supp. 2d 20, 104 (D.D.C. 2011) aff’d, 758 F.3d 265 (D.C. Cir.
2014). The business judgment rule does not apply if a plaintiff rebuts one of the
presumptions in the business judgment rule, such as by showing that the fiduciary “had a
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personal financial stake” in the matter. Id. “Where the business judgment rule does not
apply, D.C. courts apply a less deferential standard of reasonableness [under which] a
court may have to undertake a potentially wide-ranging, fact-intensive inquiry into both
substantive and procedural aspects of a decision.” Id (internal quotation marks omitted).
District of Columbia law provides that the entire fairness of a transaction is an
affirmative defense to claim of self-dealing in the partnership context. D.C. Code §29-
604.07(i) (“It is a defense to a claim under subsection (b)(2) of this section and any
comparable claim in equity or at common law that the transaction was fair to the
partnership.”). As the parties invoking the affirmative defense, the defendants bore the
burden of proving entire fairness. See, e.g., May v. Washington, Virginia & Maryland
Coach Co., 197 A.2d 267, 268 (D.C. 1964). See also Mayflower Hotel S’holders
Protective Comm. v. Mayflower Hotel Corp., 193 F.2d 666, 670-71 (D.C. Cir. 1951)
(“[W]here a fiduciary obligation is involved . . . the burden rests upon the fiduciaries to
establish the entire fairness of the transaction.”).
The defendants did not establish any procedural safeguards to ensure a fair
transaction. As discussed above, when the defendants shared Partnership information
with Bond & Pecaro, they did not obtain the necessary approval from the Partnership, and
they did not notify the plaintiffs. The defendants did not appoint an independent
representative to negotiate on plaintiffs’ behalf, nor did they condition the transaction on
a majority-of-the-minority vote. When the plaintiffs objected to the Transaction, the
defendants went forward without any modifications. The plaintiffs voted unanimously
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against the Transaction. Under the circumstances, the process the defendants followed
was not procedurally fair. See Armenian Assembly, 772 F. Supp. 2d at 104.
The defendants also did not prove that the Transaction was substantively fair. See
D.C. Code §29-604.07(i). At trial, both parties introduced expert testimony on the issue
of valuation. The defendants relied on Carlyn R. Taylor of FTI Consulting. The plaintiffs
relied on Richard H. Pierce of FOCUS LLC. Both used the discounted cash flow method
(“DCF”) to value the Partnership’s assets. Taylor also conducted a comparable
companies analysis.
A DCF model is a “standard” approach that can serve as an exclusive valuation
method when “used responsibly.” Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640
(Del. Ch. Aug. 19, 2005) (Strine, V.C.). Both DCF models were sufficiently reliable to
use as the exclusive method for determining fair value. The experts differed on certain
inputs, and by order dated October 20, 2014, the court directed Taylor to modify her
model to reflect the court’s rulings on which inputs should be used.
The parties agreed on the resulting calculation with one exception. The court
ordered that the revised DCF use projected capital expenditures equal to 5.6% of revenue
for the years 2016-2020. The parties disagreed as to the appropriate measure for
revenues. Taylor used gross revenue; Pierce used revenues on a net intra-company
roaming basis. The court previously adopted Pierce’s methodology, so the correct
approach is capital expenditures calculated as a percentage of revenue on a net intra-
company roaming basis.
The resulting valuation of the Partnership’s assets is $98,292,235.
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F. Remedies
The revised DCF valuation provided a basis for a sufficiently “responsible
estimate of [the] damages” suffered by the plaintiffs. Del. Exp. Shuttle, Inc. v. Older,
2002 WL 31458243, at *15 (Del. Ch. Oct. 23, 2002). The plaintiffs were entitled to their
pro rata share of $98,292,235. They only received their pro rata share of $68,221,500.
They suffered damages equal to 6.9671% of the difference in value of $30,070,735. The
plaintiffs are therefore awarded $2,095,058 plus nominal damages of $1 for the
defendants’ breach of the Partnership Agreement.
The plaintiffs have asked the court to award them their expenses, including their
attorneys’ fees. This court has in certain cases “exercised its discretion and concluded
that . . . a finding that the transaction was not entirely fair may justify shifting certain of
the plaintiffs’ attorneys’ fees and costs to the defendants who breached their fiduciary
duties.” In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *52 (Del. Ch. Sept.
4, 2014). In this case, the court does not believe that fee shifting is warranted.
III. CONCLUSION
The plaintiffs are awarded damages of $2,095,059 plus pre- and post-judgment
interest from September 1, 2010, until the date of payment. Interest is set at the statutory
rate, compounded quarterly, taking into account any adjustments in the underlying
Federal Discount rate. As the prevailing parties, the plaintiffs are awarded costs.
Otherwise, each side will bear its own expenses, including attorneys’ fees. The parties
will submit a form of Final Judgment implementing this decision.
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