GAMCO Asset Management Inc. v. iHeartMedia Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GAMCO ASSET MANAGEMENT INC.,
Plaintiff,
v.
iHEARTMEDIA INC.,
iHEARTCOMMUNICATIONS, INC.,
BAIN CAPITAL PARTNERS, LLC,
THOMAS H. LEE PARTNERS, L.P.,
ROBERT W. PITTMAN, VINCENTE C.A. No. 12312-VCS
PIEDRAHITA, BLAIR HENDRIX,
DANIEL G. JONES, OLIVIA SABINE,
CHRISTOPHER TEMPLE, DALE W.
TREMBLAY and DOUGLAS L. JACOBS,
Defendants,
-and-
CLEAR CHANNEL OUTDOOR
HOLDINGS, INC.
Nominal Defendant.
MEMORANDUM OPINION
Date Submitted: September 12, 2016
Date Decided: November 23, 2016
Norman M. Monhait, Esquire of Rosenthal Monhait & Goddess, P.A. of
Wilmington, Delaware; Vincent R. Cappucci, Esquire, Andrew J. Entwistle,
Esquire, and Joshua K. Porter, Esquire of Entwistle & Cappucci LLP, New York,
New York; Mark Lebovitch, Esquire, Christopher J. Orrico, Esquire, and John
Vielandi, Esquire of Bernstein Litowitz Berger & Grossmann LLP, New York,
New York; and Ned Weinberger, Esquire of Labaton Sucharow LLP, Wilmington,
Delaware, Attorneys for Plaintiff.
William B. Chandler III, Esquire, Bradley D. Sorrels, Esquire, Shannon E.
German, Esquire, and Lori W. Will, Esquire of Wilson Sonsini Goodrich & Rosati,
P.C., Wilmington, Delaware; David E. Ross, Esquire and Bradley R. Aronstam,
Esquire of Ross Aronstam & Moritz, LLP, Wilmington, Delaware; and Kevin B.
Huff, Esquire, David L. Schwarz, Esquire, and Daniel V. Dorris, Esquire of
Kellogg Huber Hansen Todd Evans & Figel, PLLC, Washington, D.C., Attorneys
for Defendants iHeartMedia, Inc., iHeartCommunications, Inc., Bain Capital
Partners, LLC, and Thomas H. Lee Partners, L.P.
SLIGHTS, Vice Chancellor
Plaintiff, GAMCO Asset Management Inc., invested in nominal defendant,
Clear Channel Outdoor Holdings, Inc. (“CCOH”), when it knew that CCOH was
locked in a contractually-created symbiotic relationship with its former parent,
iHeartCommunications, Inc. (“iHC”). Through a suite of intercompany
agreements between CCOH and iHC, negotiated and executed when CCOH was
still a wholly-owned subsidiary of iHC, the parties agreed to position iHC so that it
could exercise significant control over nearly every aspect of CCOH’s operations.
These intercompany agreements were put in place in anticipation of an initial
public offering of CCOH’s stock in 2005.
By any measure, the intercompany agreements are highly favorable to iHC.
For instance, iHC contracted to provide comprehensive management, IT, legal and
executive services to CCOH. The two entities entered into mutual financing
commitments that included an agreement whereby CCOH would sweep its excess
cash to iHC on a daily basis. And, through a so-called Master Agreement, iHC
secured the right to pre-approve any significant acquisition or disposition of assets
and any significant debt financing that CCOH might wish to undertake. The
Prospectus for the 2005 IPO disclosed these intercompany agreements in detail.
In 2012, stockholders of CCOH brought derivative suits in this Court
alleging that iHC was abusing its position as controlling stockholder of CCOH by
exploiting the various intercompany agreements, with the consent or acquiescence
1
of the CCOH Board of Directors, to the detriment of CCOH and its stockholders.
At the time of the 2012 litigation, iHC was indebted to CCOH for over $600
million on an intercompany revolving note that was integral to some of the
intercompany agreements. With approval of the Court, the 2012 litigation was
settled after an independent Special Litigation Committee of CCOH (the “SLC”)
determined that CCOH could not breach, or even modify, the various
intercompany agreements with iHC because to do so would bring potentially
irreparable consequences to CCOH. The SLC negotiated a forward-looking
settlement that featured corporate governance reforms designed to address iHC
conflicts on the CCOH Board and to more carefully manage CCOH’s ongoing
relationship with iHC under the intercompany agreements.
Less than three years later, in a move that might have inspired the great Yogi
Berra,1 GAMCO filed a Verified Stockholder Derivative Complaint (“Complaint”)
against members of the CCOH Board, iHC, an iHC affiliate and certain financial
sponsors, in which it resurrects many of the same derivative claims that were
prosecuted in 2012 and settled in 2013. GAMCO alleges that the CCOH Board’s
undisputed compliance with the forward-looking provisions of the settlement
agreement brokered in 2013 does not excuse its failure to extricate CCOH from the
1
“It’s like déjà vu all over again.” Yogi Berra Museum & Learning Center, Yogisms,
www.yogiberramuseum.org/just-for-fun/yogisms.
2
intercompany agreements in the face of iHC’s deteriorating financial condition.
GAMCO also alleges that the CCOH Board breached its fiduciary duties and
committed corporate waste when it approved a debt offering and discrete asset
sales in order to fund special dividends for the purpose of enabling iHC to address
its acute need for liquidity.
The defendants have moved to dismiss the Complaint under Court of
Chancery Rule 12(b)(6). They argue that GAMCO’s claims relating to the
intercompany agreements are barred by the settlement of the 2012 litigation and
the doctrine of res judicata. They also contend that the CCOH Board’s decisions
to sell assets, take on debt and declare dividends, which affected all CCOH
stockholders equally, are protected by the business judgment rule.
For reasons explained below, I conclude that GAMCO’s claims relating to
the intercompany agreements must be dismissed because they are barred either by
the 2013 settlement agreement and release or by res judicata. As for the claims
relating to the asset sales and debt offering, I conclude that they also must be
dismissed because the challenged transactions were arms-length transactions with
third-parties that resulted in pro rata benefits to all CCOH shareholders. The
Board’s approval of these transactions is subject to the presumption of the business
judgment rule and GAMCO has failed to allege facts that even come close to
overcoming this presumption. Because GAMCO has failed to state a claim for
3
breach of fiduciary duty, its claim for aiding and abetting a breach of fiduciary
duty against iHC, its affiliate and financial sponsors must also be dismissed.
Finally, GAMCO’s claim for unjust enrichment against iHC, et al. must be
dismissed because the theory underlying the claim is duplicative of, and not
materially broader than, its breach of fiduciary duty claims.
I. BACKGROUND
The facts are drawn from allegations in the Complaint, documents integral to
the Complaint and matters of which the Court may take judicial notice.2
A. The Parties
GAMCO is a Delaware corporation that provides investment advisory
services to open and closed-end funds, institutional and private wealth
management investors and investment partnerships. At the time it filed the
Complaint, GAMCO, along with certain of its affiliates, owned 9.9% of the
outstanding publicly-traded Class A common stock of CCOH.
2
In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *8 (Del. Ch.
Oct. 24, 2014) (“‘A judge may consider documents outside of the pleadings only when:
(1) the document is integral to a plaintiff’s claim and incorporated in the complaint or
(2) the document is not being relied upon to prove the truth of its contents.’”) (citation
omitted); In re Gardner Denver, Inc., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014)
(on a motion to dismiss, the Court may rely on documents extraneous to a complaint
“when the document, or a portion thereof, is an adjudicative fact subject to judicial
notice.”) (footnotes and internal quotation marks omitted); Narrowstep, Inc. v. Onstream
Media Corp., 2010 WL 5422405, at *5 (Del. Ch. Dec. 22, 2010) (same).
4
Defendant iHeartMedia, Inc. (“iHM”) is a Delaware corporation engaged in
the mass media industry. Through its subsidiaries, iHM owns and operates more
than 850 radio stations throughout the United States, making it the largest owner
and operator of radio stations in the nation.
iHC, formerly known as Clear Channel Communications, Inc., is a Texas
corporation and an indirect wholly-owned subsidiary of iHM. iHC owns
approximately 90% of CCOH’s outstanding shares, including more than
10,000,000 shares of Class A common stock and 315,000,000 shares of Class B
common stock, representing approximately 99% of the total voting power of
CCOH stockholders (collectively with iHM, the “iHeart Defendants”).
Defendants Bain Capital Partners, LLC and Thomas H. Lee Partners, LP are
a Massachusetts limited liability company and a Delaware limited partnership,
respectively. Both are private equity funds. Together they own 67% of iHM’s
stock and control iHC with the power to seat all but two of iHC’s directors and to
appoint iHC’s management (collectively, the “Private Equity Defendants”).
Defendants Robert W. Pittman, Vincente Piedrahita, Blair E. Hendrix,
Daniel G. Jones, Olivia Sabine, Christopher M. Temple, Dale W. Tremblay and
Douglas L. Jacobs comprise the CCOH Board of Directors (the “CCOH Board” or
“Board”). Pittman is the Executive Chairman of the Board and has served as
5
CCOH’s CEO since 2011. He also serves as a member of the Board of Directors
and CEO of iHM and iHC.
Nominal Defendant CCOH is a Delaware corporation. It is among the
largest providers of outdoor or “out-of-home” advertising in the United States and
throughout the world. It owns and operates more than 650,000 outdoor advertising
displays worldwide and generated in excess of $2.7 billion in revenue in 2015.
B. The Intercompany Agreements
In November 2005, iHC initiated an initial public offering in which it
offered 35 million shares of CCOH’s Class A common stock for sale to the public.
iHC retained a majority stake in CCOH (owning 90% of all outstanding shares)
and 99% of the voting power. In advance of the IPO, iHC and CCOH entered into
several intercompany agreements (the “Intercompany Agreements”) which govern
the relationship between the two entities. These Intercompany Agreements include
a Master Agreement, a Corporate Services Agreement, an Employee Matters
Agreement, a Tax Matters Agreement and a Trademark License Agreement. Most
relevant to this litigation are the Master Agreement and the Corporate Services
Agreement.
The Master Agreement subjects CCOH to a variety of management and
corporate governance restrictions that limit its ability to access external funding as
well as its ability to make capital investments. For instance, CCOH must obtain
6
iHC’s approval to acquire or dispose of assets in excess of $5 million and before
incurring more than $400 million in debt. CCOH is also obliged to accept certain
management services from iHC including treasury, payroll, cash management,
executive officer services, human resources and benefit services, legal services and
IT support.
The Corporate Services Agreement memorialized a cash management sweep
arrangement whereby all cash generated from CCOH’s operations that remains
after CCOH pays its accounts payable and payroll is transferred daily to iHC in
exchange for a receivable in the form of a revolving promissory note, dated
November 10, 2005, and amended in December 2009 and October 2013 (the
“Revolving Note”). By year end 2015, the Revolving Note carried a balance of
$930 million, approximately 43% of CCOH’s market capitalization of $2.124
billion. As a consequence of the cash sweep arrangement, CCOH does not manage
or control its own excess operating cash.
CCOH fully disclosed the material terms of the Intercompany Agreements in
its IPO Prospectus and its Registration Statement (Form S-1/A) filed with the SEC.
The Prospectus also disclosed that CCOH could not “terminate these agreements or
amend them in a manner [CCOH] deem[s] more favorable so long as [iHC]
7
continues to own shares of [CCOH] common stock representing more than 50% of
the total voting power of [CCOH] common stock.”3
C. The iHC Leveraged Buyout
In November 2006, iHC’s Board agreed to sell iHC for $18.7 billion, or
$37.60 per share, in a leveraged buyout led by a consortium of private equity firms
that included the Private Equity Defendants. The offer price was increased twice
and, in September 2007, the iHC stockholders approved the LBO at $39.20 per
share. Before the LBO could close, however, the global financial markets fell into
crisis, credit seized up, and the banks that had committed to finance the transaction
refused to honor their commitments. After a lengthy legal battle, the parties settled
at a revised buyout price of $36 per share, for a total transaction price of
$17.9 billion. iHC completed its merger with a subsidiary of iHM in July 2008.
As a result of the LBO, iHC took on more than $18 billion in debt, an
amount which has since grown to over $20.8 billion. This debt load quickly led to
questions in the market regarding iHC’s ability to service its debt obligations. In
May 2009, the New York Post reported that iHC was speaking with lenders about
restructuring its debt, including through a pre-packaged bankruptcy. Rumors of
impending bankruptcy made it increasingly difficult, if not impossible, for iHC to
3
Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss Pl.s’ Verified Stockholder
Derivative Compl. (“Defs.’ Opening Br.”) Ex. 1 (“Prospectus”) at 20.
8
issue debt in the public market or through arms-length transactions. This, in turn,
caused iHC to depend more heavily upon the cash management sweep arrangement
and the Revolving Note with CCOH for cash flow. Indeed, the Revolving Note
became iHC’s principal source of much needed liquidity. By December 2008, the
balance on the Revolving Note had reached $431.6 million. By the end of 2009,
the maturity date on the Revolving Note was approaching and iHC still had not
restructured its debt obligations from the LBO. This left the CCOH Board with no
choice but to extend the term of the Revolving Note to December 2017.
In December 2009, around the same time the term of the Revolving Note
was extended, Standard & Poor’s downgraded iHC’s debt to a “CCC-” rating.
Over the next few years, the outstanding balance on the Revolving Note continued
to grow. As of the quarter ending March 31, 2012, the balance had reached $702
million.
D. The 2012 Litigation
In March 2012, minority stockholders of CCOH filed a derivative complaint
challenging the decision by CCOH’s Board “to approve the 2009 amendment to
the Revolving Note on commercially–unreasonable terms, and seeking relief
requiring the Board to demand repayment of all or part of the outstanding balance”
(the “2012 Litigation”).4 The plaintiffs in the 2012 Litigation alleged that “the
4
Verified Stockholder Derivative Compl. (“Compl.”) ¶ 56.
9
Board’s letting the balance [on the Revolving Note] increase unabated with no
practical path to repayment was a breach of its duty of loyalty.”5
In response to the 2012 complaint, the CCOH Board appointed the SLC,
comprised of independent directors, to investigate and take all actions it deemed
appropriate to address the claims, including litigation or settlement. The SLC, with
the assistance of counsel, conducted its investigation over the ensuing eight
months, interviewing more than twenty witnesses and reviewing thousands of
documents.
Not surprisingly, the SLC concluded that the Intercompany Agreements very
much favored iHC. Nevertheless, the SLC was satisfied that CCOH was bound by
the Intercompany Agreements and, by their express terms, could not alter or
modify them as long as iHC owned 50% or more of the voting power of CCOH’s
outstanding common stock. The SLC also determined that any attempt to modify
the Corporate Services Agreement could trigger an event of default with respect to
iHC’s LBO lenders which would leave CCOH exposed under its indemnification
obligations to iHC for billions of dollars. Moreover, demanding repayment on the
Revolving Note would yield limited benefits since iHC could exercise substantial
control over CCOH’s use of the funds and all excess cash would simply be swept
back to iHC. The SLC thought it best to settle.
5
Id.
10
In June 2013, the parties entered into a Stipulation of Settlement (the “2013
Settlement”) which included both a specific release of certain defined claims and a
general release. The terms of the 2013 Settlement required the CCOH Board to
make an immediate demand that iHC pay $200 million on the Revolving Note and
simultaneously declare a $200 million pro rata dividend to all CCOH
stockholders. The Board also agreed to establish a special committee comprised of
three independent directors, the Intercompany Note Committee (“INC”), to
monitor the Revolving Note and issue monthly reports on the Revolving Note
balance. In addition, the INC is to monitor iHC’s liquidity position to determine
whether it crosses either of two negotiated triggers. Depending on which of the
triggers is implicated, the INC is empowered to demand repayment of some or all
of the Revolving Note balance without consequence and to declare a dividend
equal to the repayment amount.6
The first of the negotiated triggers focuses on the ratio between the
Intercompany Note balance and iHC’s liquidity. The INC is authorized to demand
repayment of the entire balance if and when iHC’s cash, cash equivalents and
available borrowing, when divided by the amount of the Revolving Note
6
To enable the INC to perform its reporting function, the 2013 Settlement requires iHC
to supply monthly and annual reports to the INC and CCOH in which it reports and
forecasts the Revolving Note balance and its liquidity position. Defs.’ Opening Br. Ex. 8
(“Stipulation of Settlement”) at 19–21.
11
apportionable to public stockholders, is projected to fall below 2.0x during a
designated projection period.7 The second negotiated trigger focuses solely on the
size of the Revolving Note. The INC is authorized to demand repayment of a
portion of the balance under this trigger if and when the amount of the Revolving
Note apportionable to public stockholders is (or is projected to be) in excess of
$114 million.
As part of the 2013 Settlement, the parties entered into a specific release of
claims that had been asserted in the litigation and a broad release of claims that
could have been asserted. Specifically, the derivative plaintiffs released:
any and all claims that (i) have been asserted in the Derivative Action,
or (ii) that could have been asserted in the Derivative Action, or in any
other court action or before any court, administrative body, tribunal,
arbitration panel, or other adjudicatory body, from the beginning of
time through the date of this Stipulation, that are based upon, arise out
of, or relate in any way, directly or indirectly, to: (a) the allegations
made in, or the subject matter of, the Derivative Action; (b) the
matters discussed in [the SLC Findings] filed concurrently with this
Stipulation; (c) the issuance by a subsidiary of the Company of the
9.25% Series A Senior Notes Due 2017 and 9.25% Series B Senior
Notes Due 2017 and the use of proceeds thereof (including repayment
of the $2.5 billion term loan payable by the Company to Clear
Channel and the amendment and extension of the Note in connection
therewith) including consummation of the issuance in lieu of any
other potential transaction considered; (d) the adoption, approval, or
7
Defs.’ Opening Br. Ex. 6 (“SLC Brief”) at 23. Although not expressly referenced in the
Complaint, the Court has considered the entirety of the 2013 Settlement documents for
context and completeness. See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797
(Del. Ch. 2016) (the “incorporation-by-reference doctrine permits a court to review the
actual document to ensure that the plaintiff has not misrepresented its contents and that
any inference the plaintiff seeks to have drawn is a reasonable one.”).
12
amendment of, or the exercise or non-exercise of rights under, the
Note; (e) any potential claims relating to the subject matter of the
Derivative Action identified by the SLC in the court of its
investigation; and/or (f) this Stipulation.8
The 2013 Settlement was presented to the Court for approval at a fairness
hearing on September 9, 2013. No CCOH stockholder objected. In determining
that the settlement was fair and reasonable, then-Chancellor Strine observed that
“the pre-IPO arrangements were formidable and it’s very difficult to complain
about them because they’re not the sort of thing that was the subject of a fiduciary
negotiation. They were disclosed and people bought into them.”9 The Court also
observed that it could not discern “any legal theory that [would allow CCOH] to
break” the Intercompany Agreements and that, “given those realities,” including
“spillover effects” from demanding repayment of the Revolving Note, the forward-
looking settlement provisions would provide “substantial benefits on an ongoing
basis” to CCOH and its stockholders.10
8
Stipulation of Settlement at 14–15, 23–25.
9
Defs.’ Reply Br. in Further Supp. of Their Mot. to Dismiss Pl.s’ Verified Stockholder
Derivative Compl. (“Defs.’ Reply Br.”) Ex. 12 (“Settlement H’rg”) at 36–37.
10
Id. at 33, 37–38.
13
E. iHC’s Financial Condition Worsens
The iHeart Defendants’ financial condition continued to deteriorate
following the 2013 Settlement. iHM reported eleven consecutive quarters of
negative net income on a consolidated basis and continued to pay high amounts of
yearly interest expense on its expanding debt. Specifically, in 2015, iHM paid
$1.74 billion in yearly interest on $20.8 billion of debt. $8.5 billion of this debt
will come due in the next three years, with $193 million in notes maturing in 2016
and $8.3 billion of bonds and term loans maturing in 2019. Currently, the iHeart
Defendants’ public debt trades at about 35% of par while iHM’s stock price has
fallen from $7.50 per share in June 2015 to $0.95 per share on May 6, 2016.
Meanwhile, the balance on the Revolving Note has continued to grow. At the start
of the 2012 Litigation, the outstanding balance was approximately $656 million.
All quarter-end and year-end balances beginning with the first quarter after the
2013 Settlement have ranged between $875 million and $950 million.
F. The Note Offering and Asset Sales
Despite the seemingly dire financial condition of its former parent to which
it is contractually (and financially) tethered, in early 2015, CCOH was in an
acquisitions mode. In February and May 2015, the Board received reports of
14
particular acquisition opportunities in strategic markets, such as New York City.11
By September 2015, in a rather abrupt volte-face, the discussion turned from new
acquisitions to potential sales of assets. At a joint meeting of the Boards of CCOH
and the iHeart Defendants on September 29, 2015, the directors in attendance
discussed selling certain CCOH Latin American businesses and certain United
States assets and considered recommendations regarding the retention of financial
advisors for the asset sales.12 At the conclusion of the meeting, CCOH’s Board
voted to retain Moelis & Company.13
In November 2015, the CCOH Board began to discuss the possibility of a
debt issuance. At a meeting on November 13, 2015, the Board asked its advisors if
CCOH could issue debt through a subsidiary and use the proceeds to fund a pro
rata dividend.14 Later that month, at a November 30, 2015 Board meeting, the
Board discussed the ramifications of an iHM bankruptcy.15 Based on projections,
iHM would not have sufficient cash flow to pay its debts beginning in the first
11
Compl. ¶ 75 (quoting Compl. Ex. A, CCOH 2015 Management Update at
CCOH001066); Compl. Ex. B (May 13, 2015 Meeting Minutes).
12
Compl. Ex. C (Sept. 29, 2015 Meeting Minutes).
13
Id.
14
Compl. Ex. E (Nov. 13, 2015 Meeting Minutes).
15
Compl. Ex. F (Nov. 30, 2015 Meeting Minutes).
15
quarter of 2017. 16 If CCOH undertook a debt issuance and the asset sales,
however, the resulting distributions to iHC would allow iHM to service its debt
through all of 2017.17
On December 16, 2015, the Board announced that, through its indirect
wholly owned subsidiary, Clear Channel International B.V., CCOH would issue
$225 million in 8.75% Senior Notes maturing in 2020 through which the
subsidiary would receive $217.8 million in net proceeds (the “Note Offering”). On
December 20, 2015, the Board declared a special cash dividend for the entire
$217.8 million, payable pro rata to holders of all Class A and Class B common
stock as of the record date of January 4, 2016 (the “January Dividend”). GAMCO
alleges that in approving the Note Offering, the CCOH Board caused CCOH to
“incur needless interest expense” at an “over-market 8.75% interest rate” and
“worsen [its] credit profile,” all for the sake of infusing the iHeart Defendants with
cash to address their acute liquidity need.18
In the first quarter of 2016, CCOH sold assets in eight strategic United
States markets in a series of transactions that generated $602 million in cash (the
“Asset Sales”). The Asset Sales were approved at Board meetings on
16
Id.
17
Id.
18
Compl. ¶¶ 85–89.
16
December 23, 2015 and January 4, 2016.19 CCOH’s financial advisors reported to
the Board that “a strong and fair process had been run, that such process had led to
serious engagement from all likely parties, and that the strong process [resulted in]
strong OIBDAN valuation multiples.”20
At its next meeting, on January 21, 2016, the CCOH Board considered
whether to dividend the proceeds from the Asset Sales and whether to demand a
repayment of a portion of the Revolving Note to fund a portion of a special
dividend. At the conclusion of the meeting, the Board notified iHC that it would
demand repayment of $300 million of the more than $990 million outstanding on
the Revolving Note effective February 4, 2016. At the same time, the Board
declared special cash dividends payable on February 4, 2016 to all Class A and
Class B stockholders of record in an aggregate amount equal to $540 million, using
proceeds from both the repayment demand and the Asset Sales (the “February
Dividend”). The February Dividend was paid to stockholders of record as of
February 1, 2016.
GAMCO alleges that in approving the Asset Sales the CCOH Board
“divested assets at suboptimal prices” on a “timetable” that benefited only the
19
Compl. Ex. G (Dec. 23, 2015 Meeting Minutes); Compl. Ex. H (Jan. 4, 2016 Meeting
Minutes).
20
Compl. Ex. G (Dec. 23, 2015 Meeting Minutes) at CCOH000695; Compl. Ex. H
(Jan. 4, 2016 Meeting Minutes) at CCOH000848.
17
iHeart Defendants. 21 As to one of the transactions, the Lamar Asset Sale, the
Complaint alleges that CCOH agreed to reduce the purchase price on the assets by
$1.5 million in order to accelerate the transaction and get cash to the iHeart
Defendants more quickly.
G. GAMCO Initiates This Litigation
GAMCO filed its Complaint on May 9, 2016, after receiving books and
records pursuant to its demand under 8 Del. C. § 220. The Complaint contains five
counts: Count I (breach of fiduciary duty against the iHeart Defendants and the
Private Equity Defendants as controlling stockholders relating to the Revolving
Note, the Intercompany Agreements, the Note Offering and the Asset Sales);
Count II (breach of fiduciary duty against the members of the CCOH Board
relating to the Revolving Note, the Intercompany Agreements, the Note Offering
and the Asset Sales); Count III (aiding and abetting breaches of fiduciary duties
against the iHeart Defendants and Private Equity Defendants); Count IV (unjust
enrichment against the iHeart Defendants and the Private Equity Defendants
related to the Note Offering and Asset Sales); and Count V (waste of corporate
assets against the members of the CCOH Board, the iHeart Defendants and the
Private Equity Defendants related to the Revolving Note, the Intercompany
Agreements, the Note Offering and the Asset Sales).
21
Compl. ¶¶ 5, 72, 100.
18
II. LEGAL ANALYSIS
A. Motion to Dismiss Standard
“[T]he governing pleading standard in Delaware to survive a motion to
dismiss is reasonable ‘conceivability.’”22 Under this standard, the Court will deny
the motion if the plaintiff has pled a reasonably conceivable cause of action. 23 All
well-pled allegations in the complaint will be regarded as true but the Court need
not accept conclusory allegations that lack any factual basis.24
B. The Breach of Fiduciary Duty Claims Related to the Revolving
Note Are Barred by the 2013 Settlement
GAMCO argues that the 2013 Settlement does not bar its claims relating to
the Revolving Note for three reasons. First, by its express terms, the 2013
Settlement releases only claims accruing up to the date of the stipulation and
release. Second, the claims asserted here are distinct from the claims asserted in
the 2012 Litigation both temporally and substantively. Third, even if the 2013
Settlement was intended to be “forward looking,” Delaware law is well-settled that
parties cannot relieve a fiduciary from complying with its fiduciary duties by
contract. For the reasons that follow, I conclude that these arguments lack merit
22
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011).
23
Id.
24
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011); Criden v.
Steinberg, 2000 WL 354390, at *1 (Del. Ch. Mar. 23, 2000).
19
and that Counts I and II as they relate to the Revolving Note and Intercompany
Agreements must be dismissed.
1. The Scope of the 2013 Settlement
According to GAMCO, Defendants’ attempt to invoke the 2013 Settlement
as a basis to bar GAMCO’s claims relating to the Revolving Note “ignores the
stipulation’s express limitation that ‘Released Plaintiff Claims’ included only
claims ‘from the beginning of time through the date of this Stipulation.’”25 The
Complaint alleges that even after the 2013 Settlement CCOH continues to funnel
money to iHC while the financial fitness of all iHeart entities continues to
deteriorate, making it all the more likely that iHC will default on its substantial
contractual obligations to CCOH. Since the Complaint pleads facts relating to
events that post-date the 2013 Settlement, GAMCO argues that the claims arising
from those facts could not have been released.
“[A]n effective release terminates the rights of the party executing and
delivering the release and . . . is a bar to recovery on the claim released.” 26 “When
determining whether a release covers a claim, ‘the intent of the parties as to its
scope and effect are controlling, and the court will attempt to ascertain their intent
25
Pl.s’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Stockholder
Derivative Compl. (“Pl.s’ Answering Br.”) 20 (citing Stipulation of Settlement at 14–
15).
26
Seven Inv., LLC v. AD Capital, LLC, 32 A.3d 391, 396 (Del. Ch. 2011) (quoting Hicks
v. Soroka, 188 A.2d 133, 138 (Del. Super. Ct. 1963)).
20
from the overall language of the document.’”27 “Delaware courts recognize the
validity of general releases,”28 and acknowledge that they are “intended to cover
everything – what the parties presently have in mind, as well as what they do not
have in mind.”29 And “[i]f [a subsequent] claim falls within the plain language of
[a] release, then the claim should be dismissed.”30
The release the parties entered in connection with the 2013 Settlement
released “any and all claims that (i) have been asserted in the Derivative Action, or
(ii) that could have been asserted in the Derivative Action . . . that are based upon,
arise out of, or relate in any way, directly or indirectly, to . . . (a) the allegations
made in, or the subject matter of the [2012 Litigation]; (b) the matters discussed in
the [SLC’s investigation]; (c) . . . the amendment and extension of the [Revolving
Note] . . .; [and] (d) adoption, approval, or amendment of, or on the exercise or
non-exercise of rights under, the [Revolving Note].” 31 The release language
reflects an intent to give both a specific release and the quintessential general
27
Id.
28
Deuly v. DynCorp Int’l, Inc., 8 A.3d 1156, 1163 (Del. 2010), cert. denied, 563 U.S.
938 (2011).
29
Corp. Prop. Assocs. 6 v. Hallwood Gp., Inc., 817 A.2d 777, 779 (Del. 2003) (quoting
Adams v. Jankouskas, 452 A.2d 148, 156 (Del. 1982)).
30
Id.
31
Stipulation of Settlement at 14–15.
21
release.32 And while GAMCO is correct that many of the facts on which it bases
its claims relating to the Revolving Note occurred after the 2013 Settlement, it
misses the point when it argues that this temporal separation alone allows its
current claims to survive the extinguishing effects of the release entered in 2013.
In Delaware, the settlement of representative litigation “can release claims
that were not specifically asserted in the settled action . . . if those claims are
‘based on the same identical factual predicate or the same set of operative facts’ as
the underlying action.”33 The operative facts supporting GAMCO’s claims relating
to the Revolving Note are that iHC is significantly burdened with debt and on the
brink of default, that iHC uses CCOH as its primary source of liquidity and that
CCOH has done nothing to demand repayment. 34 To the extent these same or
similar operative facts were asserted to support the same or similar claims in the
2012 Litigation, the broad release of these claims in 2013 would bar GAMCO
from reasserting them here. As discussed below, a comparison of the two
operative complaints reveals that GAMCO’s claims relating to the Intercompany
32
See Corp. Prop. Assocs. 6, 817 A.2d at 779 (discussing language utilized by the parties
to reflect their intent to create a general release of claims).
33
In re Phila. Stock Exch., Inc., 945 A.2d 1123, 1146–47 (Del. 2008); see also Deuly, 8
A.3d at 1164 (affirming Rule 12(b)(6) dismissal of claims deemed to be barred by
settlement release); Metro. Life Ins. Co. v. Tremont Gp. Hldgs., Inc., 2012 WL 6632681,
at *10–13 (Del. Ch. Dec. 20, 2012) (dismissing derivative claims upon concluding they
were barred by prior settlement).
34
Compl. ¶¶ 3, 9, 11.
22
Agreements were prosecuted in the 2012 Litigation and released in the 2013
Settlement. 35
2. CCOH Released the Claims Regarding the Intercompany
Agreements Set Forth in the Complaint
GAMCO alleges in its Complaint that the 2012 Litigation was brought to
challenge the CCOH Board’s decision to approve the 2009 amendment to the
Revolving Note on commercially-unreasonable terms “and [to seek] relief
requiring the Board to demand repayment of all or part of the outstanding
balance.” 36 Although not pled in its Complaint, GAMCO contends in its
Answering Brief that plaintiffs in the 2012 Litigation sought to force the Board to
“break” the Intercompany Agreements or to hold the Board liable for failing to
terminate the Intercompany Agreements. 37 While plaintiffs certainly advanced
these two themes in the 2012 Litigation, the claims asserted then and resolved in
the 2013 Settlement were much broader. The following chart, taken largely from
the chart submitted with the Defendants’ Opening Brief, lines up the allegations
made in the 2012 Litigation with GAMCO’s allegations here:
35
Defs. Opening Br. Ex. 5 (“2012 Compl.”) at ¶¶ 1–5, 7.
36
Compl. ¶ 56.
37
Pl.s’ Answering Br. 22. The fact that this description of the 2012 Litigation appears
for the first time in GAMCO’s Answering Brief reveals GAMCO’s attempt to adjust its
characterization of the 2012 Litigation to meet the Defendants’ release argument.
23
2012 Litigation Allegations GAMCO’s Allegations
¶ 1 – “This derivative lawsuit arises ¶ 1 – “This derivative action arises
from the decision by [CCOH’s] because CCOH’s Board refuses to
controlling shareholder, [iHC], to untangle the Company from
compel the Individual Defendants to [Intercompany Agreements] with its
approve a $1.0 billion unsecured majority owner iHC . . . that are
loan . . . by [CCOH] to [iHC] on terms materially deleterious to the current and
so incredibly favorable to [iHC] that no future performance of CCOH. The
rational third-party would have ever Intercompany Agreements act as an
agreed to lend money on such terms. . . . anchor dragging down CCOH for the
[CCOH] faces a severe risk that the benefit of the iHeart and Private Equity
unsecured loan will never be paid back Defendants.”
because [iHC] has been drowning under
a massive debt load since its 2008
leveraged buyout.”
¶ 3 – “In 2008, Bain Capital Partners, ¶ 3 – “While the cash management
LLC . . . and Thomas H. Lee Partners, arrangement was never intended to be a
L.P. . . . took [iHC] private in a $24 financing source for CCOH’s parents,
billion leveraged buyout. The Buyout iHC and iHM, the [Intercompany Note]
saddled [iHC] with more than $18 balance has increased as the iHeart
billion in debt. This debilitating debt Defendants’ financial health has
load has caused concern that [iHC] could deteriorated. Virtually all or a sizable
default on its obligations and [iHC]is portion of the cash swept from the
currently at risk of going into Company is used for iHC’s day-
bankruptcy. Doubts about [iHC’s] to-day operations or to prop up the
financial health have made it extremely iHeart Defendants’ unsustainable capital
difficult for [iHC] to raise capital.” structure, which is mired in $20.8 billion
in debt. To date, the iHeart Defendants
¶ 4 – “Bain and THL [have] forc[ed] have managed to service the suffocating
[CCOH] and its public shareholders to debt, but they continue to sustain
become an involuntary source of hundreds of millions in losses each year
capital.” and face billions of dollars in maturing
debt that they have little, if any, prospect
¶ 5 – “To provide much needed liquidity, of repaying or refinancing.”
[iHC] has abused its position as
controlling shareholder of [CCOH].”
24
2012 Litigation Allegations GAMCO’s Allegations
¶ 7 – “In late 2011, one of [CCOH’s] ¶ 8 – “[T]he Board . . . permits CCOH to
shareholders questioned the Board be used as a liquidity source for the
regarding the propriety of the iHeart Defendants in wholesale
[Intercompany Note]. Instead of derogation of their fiduciary duties.”
conducting a legitimate review of the
[Note], the Board told the shareholder ¶ 9 – The Board “refus[es] to extricate
that the Company could not unilaterally CCOHH from the agreements.”
modify or eliminate the contractual
obligations under the [Note]. The ¶ 13 – “Any director acting in good faith
Board’s response is simply untrue. The and solely in the interests of CCOH and
[Note] is payable on demand and if the its minority shareholders would: (i) seek
Board was concerned with the public to terminate the cash management
shareholders’ best interest, the Board arrangement and normalize CCOH’s
would demand immediate repayment.” administrative and operating structure to
shield the Company from its exposure to
¶ 61 – “During the week of February 27, the iHC and the iHeart Defendants’
2012, the Committee sent a letter to JHL unsustainable capital structure; (ii) take
informing JHL that the Committee’s all actions necessary to stop dollars from
review of the Loan had not revealed a being diverted from CCOH that should
way that [CCOH] could unilaterally properly be invested in the Company’s
modify or eliminate the contractual own growth and opportunity; and (iii)
commitment. The Committee’s conclude that the [Intercompany Note]
response is simply wrong and balance should have been and has to be
emphasizes that the Board’s loyalty lies reduced or eliminated.”
with [iHC] and not the [CCOH’s] public
shareholders.” ¶ 110 – “CCOH’s future viability as a
public company and achieving
¶ 63 – “In its letter to JHL, the maximum value for its stockholders
Committee ignores the fact that [CCOH] plainly requires the Board to extricate
could demand repayment of the [Note] the Company from the restrictions that
by [iHC] at any time. However, because iHC and the other Defendants have
demanding immediate repayment could placed on it. The Board must normalize
be damaging to Bain and THL’s multi- the administrative and operational
billion dollar investment in [iHC], the structure and reduce operational risk by
[CCOH] Board has not taken such severing the administrative relationships
action, even though doing so is with the iHeart Defendants whose
necessary to protect the interests of the unsustainable debt structure puts CCOH
[CCOH’s] public shareholders.” at significant operational and fiscal risk.”
25
2012 Litigation Allegations GAMCO’s Allegations
¶ 54 – “Further, because [iHC] takes all ¶ 4 – “The Intercompany Agreements
of Outdoor’s cash on a daily basis, it remain in place solely for the benefit of
prevents Outdoor from utilizing that Defendants and serve no rational
cash to make alternative investments. In business purpose for CCOH.”
essence, therefore, the ‘cash
management program’ not only compels ¶ 5 – “[T]he Intercompany Agreements
Outdoor to serve as an unsecured and CCOH’s lack of autonomy over its
creditor of [iHC] with no control over its own cash have” prevented CCOH from
own finances, but also makes [iHC] “making acquisitions” and “investing its
Outdoor’s only cash investment capital.”
rendering any sort of responsible
diversification impossible.” ¶ 40 – “iHC’s dominion over CCOH
restricts [CCOH] from exploring its own
¶ 73 – “[T]he [Intercompany Note] favorable business opportunities.”
provides no benefit to [CCOH] and
could have catastrophic effects on ¶ 62 – Alleging the Board has a
[CCOH] in the event [iHC] declares for “continuing and unremitting obligation
bankruptcy.” to attempt[] to free the Company from
its demonstrably harmful agreements
¶ 86 – “As a result of the actions of the with iHC to permit it to explore
Individual Defendants described herein, autonomous business and growth
the Company has been deprived tens of opportunities.”
millions of dollars in interest payments
and risks being forever deprived of being ¶ 111 – “If the Board were acting solely
repaid the principal on the borrowings for the Company, it would seek to sever
under the [Revolving Note].” the lending relationship to help stabilize
the CCOH financial and capital structure
and to eliminate the risk of the iHeart
Defendants’ dominion over $640 million
(historically closer to $1 billion) in
CCOH’s cash. Doing so would enable
CCOH to deploy that capital to grow the
business or to use it in connection with
transactions that help unlock value.”
26
2012 Litigation Allegations GAMCO’s Allegations
¶ 85 – “The Individual Defendants have ¶¶ 137–38 – “The Board Defendants
breached their duty of loyalty by have breached their duty of loyalty by
approving the Amended [Revolving elevating and favoring the interests of
Note] which elevates the interests of iHM, iHC, and the Private Equity
[iHC] over the interests of [CCOH] and Defendants over the interests of CCOH
the Company’s public shareholders.” and its minority stockholders, including
by causing the Company, or directing
¶ 95 – “Plaintiff prays for judgment and the Board Defendants to cause the
relief as follows: . . . Rescinding the Company to, among other things: (i)
[Intercompany Note], and terminating continually loan iHC cash under the
the cash management arrangement.” [Intercompany] Note at commercially-
irrational rates. . . .”
¶56 – “Then [in 2012], as now, the
Board’s letting the balance increase
unabated with no practical path to
repayment was a breach of its duty of
loyalty.”
¶58 – “Plaintiffs in the 2012 Litigation
also alleged that CCOH’s Board
breached its duties by refusing to
demand repayment on the note and
allowing the amounts owed to escalate.”
Tellingly, GAMCO’s lead-off allegation is that “CCOH’s Board refuses to
untangle [CCOH] from intercompany agreements . . . that are materially
deleterious to the current and future performance of CCOH.”38 The Complaint
goes on to recite facts, almost all of which model the allegations made by the
derivative plaintiffs in 2012, to support GAMCO’s claims that the CCOH Board is
38
Compl. ¶ 1. Compare 2012 Compl. ¶ 1 (alleging that the CCOH Board committed
CCOH to an unsecured loan (the Revolving Note) that placed CCOH at “severe risk” that
the loan “will never be paid back”).
27
acting disloyally to CCOH’s stockholders by continuing to abide by the
Intercompany Agreements, especially the Revolving Note. As the comparison of
the complaints reveals, the plaintiffs in 2012 also cited the increasing size of the
Revolving Note and iHC’s increasing reliance on the Revolving Note as bases to
contend that the CCOH Board breached its fiduciary duties by continuing to honor
the Revolving Note and that the Board should “demand immediate repayment.” 39
GAMCO argues that the operative facts supporting its claims here are
distinct from those litigated and released in the 2013 Settlement since the ever-
increasing balance on the Revolving Note and the ever-worsening state of iHC’s
financial fitness occurred after the 2013 Settlement. But the reality is that the
parties to the 2013 Settlement knew full well that the balance of the Revolving
Note was going to continue to grow long after the parties agreed to a broad release
of claims. 40 This is precisely why the 2013 Settlement approved by the Court
included forward-looking liquidity triggers designed to address the concern that the
Revolving Note balance might continue to grow and iHC’s financial condition
might continue to deteriorate to degrees that would require CCOH to demand
repayment of the Revolving Note. GAMCO has not alleged that either of these
39
Compare 2012 Compl. ¶¶ 3, 7; 54, with Compl. ¶¶ 1-3, 56-58, 63–67.
40
Settlement Hr’g at 12–13; Stipulation of Settlement at 3 (“[CCOH] anticipates that the
balance on the [Revolving Note] will increase to over $1.0 billion in the next few
years . . .”); 2012 Compl. ¶ 5 (“[CCOH] has publicly disclosed that it expects the size of
the [Revolving Note] to balloon over $1 billion in the next few years.”).
28
triggers has been pulled or that the INC or CCOH Board have somehow failed to
comply with their monitoring and reporting obligations under the 2013 Settlement.
The growing Revolving Note balance and the worsening financial condition of iHC
are extensions of the same operative facts that were the foundation of the plaintiff’s
claims in 2012 and at the heart of the 2013 Settlement.
Under GAMCO’s view of the 2013 Settlement, and its construction of
Delaware’s “operative facts” test for determining the scope of releases, any CCOH
stockholder could have initiated derivative litigation against the CCOH Board to
challenge the Board’s ongoing commitment to the Intercompany Agreements
before the ink was even dry on the 2013 Settlement based on the logic that iHC’s
financial condition had continued to worsen, the balance of the Revolving Note
had continued to grow, and the CCOH Board had continued to abide by the terms
of the Intercompany Agreements and the 2013 Settlement to the detriment of
CCOH shareholders. This construction of the 2013 Settlement and Delaware
release law would render the 2013 Settlement a practical nullity. It would also be
contrary to the intent of the parties to the 2013 Settlement with regard to the “scope
and effect” of the release and would disrupt the “global peace” they sought to
achieve.41
41
See Seven Inv., LLC, 32 A.3d at 396; In re Countrywide Corp. S’holders Litig., 2009
WL 846019, at *10 (Del. Ch. Mar. 31, 2009) (noting that “settlement often is not possible
29
3. GAMCO Has Not Pled an Actionable Breach of Fiduciary
Duty Claim With Respect to the Intercompany Agreements
As noted, GAMCO has not alleged that iHC is in default on the Revolving
Note or that the INC or the CCOH Board have failed to implement or honor the
forward-looking elements of the 2013 Settlement. Instead, they contend that even
if iHC is not in default, even if the CCOH Board has complied with the 2013
Settlement, and even if the specific language of the release could be interpreted to
encompass the claims it has asserted here, the CCOH Board must still be held to
answer for its failure to call the Revolving Note because it is well-settled under
Delaware law that corporate fiduciaries cannot secure a contractual release that
purports to allow them to avoid their fiduciary duties.42 GAMCO points out that
the parties to the 2013 Settlement made clear to the Court during the fairness
hearing that nothing in the settlement would relieve the CCOH Board of its
ongoing fiduciary duties.43 With this in mind, GAMCO argues the CCOH Board
without granting such ‘global peace’”). See also Phila. Stock Exch., 945 A.2d at 1137
(noting that general releases are designed to provide “complete peace”).
42
Pl.s’ Answering Br. 18 (citing Paramount Commc’ns Inc. v. QVC Network Inc., 637
A.2d 34, 51 (Del. 1993)).
43
Settlement Hr’g at 24 (“You always have to be mindful of your fiduciary duties.”).
30
should be even more conscious of its fiduciary duties because the 2013 Settlement
put the Board on notice of its ongoing duty to monitor the Revolving Note.44
GAMCO is correct that, in Delaware, corporate fiduciaries cannot contract
around fiduciary duties.45 But this settled principle of Delaware law cannot take
GAMCO where it wants to go. To understand why, it is helpful to focus again on
precisely what the CCOH Board was confronting in 2013 with respect to the
Intercompany Agreements, and what it has been confronting ever since.
As noted by the SLC when investigating the claims made in the 2012
Litigation, the Intercompany Agreements placed CCOH in a position where (1) it
could not terminate or renegotiate the agreements because iHC and its affiliates
beneficially owned more than 50% of the voting power of CCOH common stock;
(2) it could not breach the agreements because it was obligated to indemnify iHC if
it caused iHC to breach its credit agreements with lenders (a potential liability of
billions of dollars); (3) it could not freely use any of the proceeds it might recover
if it attempted to call the Revolving Note because iHC had the right to pre-approve
any significant asset acquisition or sale; and (4) it could not sit on the cash it
44
Compl. ¶ 62 (“The 2012 Litigation plainly put each of the Board Defendants on notice
of the unreasonableness of allowing iHC to increase the Revolving Note balance without
limit or regard for the effect on CCOH. It also reminded each Board Defendant of their
independent and constant, continuing and unremitting obligation to consider CCOH’s
interests . . .”).
45
Paramount Commc’ns Inc., 637 A.2d at 51.
31
received upon calling the Revolving Note while it assessed how best to deploy that
cash because any funds in excess of amounts required to satisfy accounts payable
and make payroll would have to be swept back to iHC the same day they landed in
CCOH’s accounts. 46 Indeed, at the fairness hearing in 2013, then-Chancellor
Strine described the Intercompany Agreements as “formidable” and observed that
he could conceive of no “legal theory that was going to allow [CCOH] to break”
them.47
Given the corner into which the Intercompany Agreements have painted the
CCOH Board, there is no reasonably conceivable basis upon which GAMCO can
establish that the Board has breached its fiduciary duty by adhering to the
carefully-negotiated governance and monitoring provisions agreed to in the 2013
Settlement. 48 Requiring the Board to do anything more under the factual
46
Defs.’ Opening Br. Ex. 7 (“SLC Findings”) at 1–2, 4; Prospectus at 61–62. See
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995),
aff’d, 672 A.2d 35 (Del. 1996) (controlling stockholder “not required to give up legal
rights that it clearly possesses.”).
47
Settlement H’rg at 36–37.
48
Nor can GAMCO state a viable breach of fiduciary duty claim against the iHeart
Defendants as controllers. Delaware law is clear that a controller is free to exercise its
bargained-for contractual rights without breaching its fiduciary duties, even when doing
so might be to the detriment of the stockholders to whom the duties are owed. See In re
CNX Gas Corp. S’holders Litig., 2010 WL 2291842, at *9 (Del. Ch. May 25, 2010). See
also Getty Oil Co. v. Skelly Oil Co., 267 A.2d 883, 888 (Del. 1970) (“[T]he duty [of
parent to its subsidiary] does not require self-sacrifice from the parent”); Odyssey P’rs,
L.P. v. Fleming Cos., Inc., 735 A.2d 386, 411 (Del. Ch. 1999) (holding that controlling
stockholder was under no fiduciary obligation to agree to a proposal that would have
“required significant and disproportionate self-sacrifice”).
32
circumstances pled in the Complaint would be a futile gesture and the Complaint
pleads no facts that would suggest otherwise. “Equity ought not to attempt futile
acts.”49 Stated differently, our law does not require corporate boards to engage in
pointless exercises, much less those that pose a serious risk of substantial harm to
the company and its stockholders.50 While circumstances may arise that would
require the CCOH Board, in the proper exercise of its fiduciary duties, to demand
repayment of the Revolving Note even absent one of the liquidity triggers being
reached, GAMCO has not alleged the presence of those circumstances in the
Complaint.
C. The Breach of Fiduciary Duty Claim Related to the Revolving
Note Is Barred by Res Judicata
Even if the Complaint was not barred by the 2013 Settlement, GAMCO has
failed to plead facts that would allow it to overcome the preclusive effects of res
judicata. As our Supreme Court has explained, “the doctrine of res judicata serves
to prevent a multiplicity of needless litigation of issues by limiting parties to one
fair trial of an issue or cause of action which has been raised or should have been
49
Freedman v. Rest. Assoc. Indus., Inc., 1987 WL 14323, at *9 (Del. Ch. Oct. 16, 1987)
(Allen, C.).
50
See Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del. 1987); McMullin v.
Beran, 765 A.2d 910, 920 (Del. 2000). See also In re Sirius XM S’holder Litig., 2013
WL 5411268, at *6 (Del. Ch. Sept. 27, 2013) (dismissing breach of fiduciary duty claim
where contract prohibited actions plaintiffs claimed directors should take); Hokanson v.
Petty, 2008 WL 5169633, at *6 (Del. Ch. Dec. 10, 2008) (same).
33
raised in a court of competent jurisdiction.”51 “Res judicata operates to bar a claim
where the following five-part test is satisfied: (1) the original court had jurisdiction
over the subject matter and the parties; (2) the parties to the original action were
the same as those parties, or in privity, in the case at bar; (3) the original cause of
action or the issues decided was the same as the case at bar; (4) the issues in the
prior action must have been decided adversely to the [party] in the case at bar; and
(5) the decree in the prior action was a final decree.”52
This Court clearly had jurisdiction to resolve the 2012 Litigation. CCOH
was the real party in interest in that action and is the real party in interest in this
action.53 Plaintiffs in the 2012 Litigation did not prevail on most of their claims
and the matter ultimately was resolved with a final decree of dismissal after the
2013 Settlement was approved. 54 These points are not disputed. Accordingly,
51
LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 192 (Del. 2009) (quoting Taylor
v. Desmond, 1990 WL 18366, at *2 (Del. Super. Ct. Jan. 25), aff’d, 1990 WL 168243
(Del. Aug. 31, 1990) (holding that the doctrine bars “all issues which might have been
raised and decided in the first suit as well as to all issues that actually were decided.”).
52
Id. (quoting Dover Historical Soc’y, Inc. v. City of Dover Planning Comm’n, 902 A.2d
1084, 1092 (Del 2000)).
53
See Cantor v. Sachs, 162 A. 73, 76 (Del. Ch. 1932) (holding that the corporation is the
party in interest in a stockholder derivative suit).
54
See Sternberg v. O’Neil, 1989 WL 137932, at *4 (Del. Ch. Nov. 9, 1989) (“Since the
order approving the settlement is a final judgment, it is res judicata.”); Monohan v. N.Y.
City Dep’t of Corr., 214 F.3d 275, 289 (2d Cir. 2000) (holding that prior settlement
between parties entitled to res judicata effect because otherwise “[t]he efficiencies
created by a mutually agreeable settlement would be lost.”).
34
only the third element of res judicata (the similarity of the causes of action or
issues) is relevant here.
Delaware courts will find an identity of issues for res judicata purposes
when “the same transaction formed the basis for both the present and former suits”
and the plaintiff “‘neglected or failed to assert claims which in fairness should have
been asserted in the first action.’”55 To resist a finding that resolution of the 2012
Litigation is res judicata, GAMCO restates most of the same points it raised in
response to the Defendants’ release argument. The core of its res judicata
argument is that “the same transactions did not form the basis for Plaintiff’s claims
[in the Complaint] and those in the 2012 Litigation.”56 According to GAMCO, the
plaintiffs in the 2012 Litigation sought “to force the Board to ‘break’ the
Intercompany Agreements or hold the Board liable for failing to terminate the
Intercompany Agreements,”57 as well as to challenge a 2009 amendment to the
Revolving Note while, in this case, GAMCO attempts “to hold the Board
55
LaPoint, 970 A.2d at 193–194 (citing Kossol v. Ashton Condo. Ass’n, Inc., 1994 WL
10861, at *2 (Del. Jan. 6, 1994)).
56
Pl.s’ Answering Br. 22.
57
Id. (emphasis added). Of course, as noted, several paragraphs of the Complaint take
the CCOH Board to task for “[refusing] to untangle [CCOH] from the intercompany
agreements. . . .”; “[refusing] to extricate CCOH from the agreements. . .”; “[failing] to
attempt to terminate the Company’s participation in the Intercompany Agreements . . .”;
“[not seeking] to terminate the cash management arrangement . . .”; and “[not attempting]
to terminate the cash-management sweep arrangement or other Intercompany
Agreements.” Compl. ¶¶ 1, 9, 11, 13, 61.
35
accountable for refusing to take any steps to protect CCOH from the iHeart
Defendants’ and their worsening financial crisis [by demanding repayment]. . . .”58
GAMCO reiterates that because the events set forth in the Complaint occurred
after the 2013 Settlement, “[t]hose facts were not, and could not have been, known
to plaintiffs in the second action at the time of the first action.”59
GAMCO’s res judicata argument reads a bit like alternative history and does
not square with its own description of the 2012 Litigation in its Complaint. While
GAMCO now argues that the 2012 Litigation was about forcing the CCOH Board
to terminate the Intercompany Agreements (a theme it replays in its Complaint),
and about challenging the decision by the CCOH Board to approve a 2009
amendment to the Revolving Note, 60 its Complaint actually acknowledges the
claims in the 2012 Litigation that sought to hold the CCOH Board accountable for
refusing to take any steps to protect CCOH from the iHeart Defendants’ worsening
financial crisis.61
58
Id.
59
LaPoint, 970 A.2d at 195.
60
Pl.s’ Answering Br. 22 (“Unlike the plaintiffs in the 2012 Litigation, Plaintiff here does
not seek to force the Board to ‘break’ the Intercompany Agreements or hold the Board
liable for failing to terminate the Intercompany Agreements.”); Pl.s’ Answering Br. 7
(“The 2012 Litigation challenged the decision by CCOH’s Board to approve the 2009
amendment to the Revolving Note on terms alleged to be commercially-unreasonable.”).
61
See Compl. ¶ 56 (“Then, as now, the Board’s letting the balance increase unabated with
no practical path to repayment was a breach of its duty of loyalty.”); Compl. ¶ 58
36
To rehash, the fact that the balance on the Revolving Note was going to
increase was well known to the parties and the Court when the 2013 Settlement
was presented for approval, as was the fact that the iHeart Defendants’ financial
fitness may well continue to worsen. Indeed, these facts animated the forward-
looking provisions of the 2013 Settlement agreements and were important to the
Court’s determination that CCOH was securing meaningful benefits from the
settlement. In light of this glaring reality in 2013, GAMCO’s effort to characterize
the 2012 Litigation as a controversy that pre-dated a steadily-increasing Revolving
Note balance and a steadily-worsening iHC financial condition is simply not
credible. The fact that the predictions have materialized—the Revolving Note
balance has increased and iHC’s financial condition has worsened—reflects a
continuation of the “common nucleus of operative facts” that were at the heart of
the 2012 Litigation, not a separate transaction for purposes of res judicata. 62
Consequently, GAMCO’s claims regarding the Revolving Note and Intercompany
Agreements (Counts I & II) are barred by res judicata.
(“Plaintiffs in the 2012 Litigation also alleged that CCOH’s Board breached its duties by
refusing to demand repayment on the note and allowing the amounts owed to escalate.”).
62
LaPoint, 970 A.2d at 194 (citing Maldonado v. Flynn, 417 A.2d 378, 383 (Del. Ch.
1980)).
37
D. GAMCO Has Failed to State a Breach of Fiduciary Duty Claim
Related to the Note Offering and Asset Sales
GAMCO alleges that the CCOH Board, iHeart Defendants and the Private
Equity Defendants as controllers have breached their fiduciary duties to the
minority stockholders by “caus[ing] [CCOH] to sell valuable assets and incur
interest expense on new debt in order to prop up the iHeart Defendants’
overleveraged and unsustainable capital structure.” 63 These transactions, it is
alleged, “demonstrate commercially-unreasonable stripping of value from CCOH
for Defendants’ benefit [and] constitute serious breaches of fiduciary duty.” 64
Defendants have moved to dismiss these claims because the sale of non-core assets
and the incurrence of debt were arms-length transactions with third-parties that
resulted in pro rata distributions of dividends to all CCOH stockholders, including
GAMCO. This dynamic, according to Defendants, is “fatal to [GAMCO’s]
claim.”65
It is well-settled that “Delaware law imposes fiduciary duties on those who
effectively control a corporation.” 66 iHC, as holder of approximately 90% of
CCOH’s outstanding shares and 99% of the stockholder voting power is, by any
63
Compl. ¶ 1.
64
Id.
65
Defs.’ Opening Br. 38.
66
Quadrant Structured Prods. Co., LTD. v. Vertin, 102 A.3d 155, 183–184 (Del. Ch.
2014).
38
measure, the controlling stockholder of CCOH. iHC is wholly owned by iHM.
The Private Equity Defendants own 67% of iHMs stock and hold the power to
appoint all but two of iHC’s directors as well as all of its senior management. On
these facts, it is not contested that the iHeart Defendants and the Private Equity
Defendants owe fiduciary duties to the minority stockholders by virtue of their
position as controllers of CCOH.67
GAMCO contends that the CCOH Board’s approval of the challenged
transactions must be reviewed for entire fairness because both the Asset Sales and
Note Offering were undertaken for the sole purpose of benefitting the controlling
stockholder and its affiliates by addressing their unique and acute liquidity needs at
the expense of the other GAMCO stockholders. In response, Defendants invoke
the seminal Sinclair Oil Corp. v. Levien68 to argue that the mere fact the challenged
transactions benefited the iHeart Defendants and Private Equity Defendants as
controllers is not a basis to strip the CCOH Board of the cloak of the business
judgment rule when all CCOH stockholders received pro rata benefits. As is often
the case, the threshold determination of the appropriate standard of review by
which the Defendants’ conduct must be measured will be dispositive of the motion
to dismiss GAMCO’s breach of fiduciary duty claim.
67
Because the Defendants have not disputed this point for purposes of this Motion, I have
assumed it to be correct for purposes of my analysis.
68
280 A.2d 717 (Del. 1971).
39
1. The Standard of Review in the Controlling Stockholder
Context
“Delaware’s default standard of review is the business judgment rule” which
is “a principle of non-review that ‘reflects and promotes the role of the board of
directors as the proper body to manage the business and affairs of the
corporation.’”69 Entire fairness, on the other hand, is the most “onerous” standard
of review under Delaware law.70 In the controlling stockholder context, the entire
fairness standard imposes upon the defendants “the burden of proving that the
transaction . . . was entirely fair to the minority.”71 Entire fairness, however, “is
not implicated solely because a company has a controlling stockholder.”72 Rather,
entire fairness will govern only when “the controller . . . engage[s] in a conflicted
transaction.”73
69
Quadrant, 102 A.3d at 183 (citing In re Trados Inc. S’holder Litig., 2009 WL
2225958, at *6 (Del. Ch. July 24, 2009)). See also Williams v. Geier, 671 A.2d 1368,
1371 (Del. 1996) (holding that directors are presumed to have acted “independently, with
due care, in good faith and in the honest belief that [their] actions were in the
stockholders’ best interests”).
70
In re Trados Inc. S’holders Litig., 73 A.3d 17, 44 (Del. Ch. 2013).
71
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1239 (Del. 2012) (holding defendants
have the burden of proving “fair dealing and fair price.”).
72
Crimson, 2014 WL 5449419, at *12.
73
Id.
40
In In re Crimson Exploration Inc. Shareholder Litigation, 74 the Court
identified two instances where a controller engages in the kind of conflicted
transaction that will justify entire fairness review. 75 The first is where the
controller stands on both sides of the transaction. 76 In the transactions at issue
here, the iHeart Defendants and Private Equity Defendants were clearly not on
both sides of the transactions and GAMCO does not allege otherwise.77
The second category of conflicted transactions where Delaware courts will
invoke entire fairness review involve those in which the controller “competes with
the common stockholders for consideration.”78 These cases exist in three subsets:
74
2014 WL 5449419 (Del. Ch. Oct. 24, 2014).
75
Id. at *12.
76
Id. See also Larkin v. Shah, 2016 WL 4485477, at *9 (Del. Ch. Aug. 25, 2016)
(“[C]ases where the controller stands on both sides of the transaction present a
particularly compelling reason to apply entire fairness: both corporate decision-making
bodies to which Delaware courts ardently defer—the board of directors and disinterested
voting stockholders—are considered compromised by the controller's influence.”) (citing
Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014)).
77
Compl. Ex. G (December 23, 2015 Meeting Minutes) at CCOH000693. Because
GAMCO acknowledges that this is not a case where the alleged controllers stood on both
sides of the transactions, several of the cases it cites in support of its argument that the
Court must review the transactions for entire fairness are inapposite. See, e.g., OTK
Assocs., LLC v. Friedman, 85 A.3d 696 (Del. Ch. 2014) (involving a controller on both
sides of the transaction); In re Ezcorp Inc. Consulting Agmt. Deriv. Litig., 2016 WL
301245 (Del. Ch. Jan. 25, 2016) (same); Teachers Ret. Sys. of La. v. Aidinoff, 900 A.2d
654 (Del. Ch. 2006) (same).
78
Crimson, 2014 WL 5449419, at *12.
41
(1) “disparate consideration” cases; (2) “continuing stake” cases; and (3) “unique
benefit” cases.79
In a “disparate consideration” case, the controller takes more monetary
consideration from the third-party transaction than is given to the minority.80 In
this case, there is no dispute that the challenged transactions led to pro rata
dividends for all stockholders.
In a “continuing stake” case, the controller receives more consideration from
the third-party transaction than the other stockholders in a form other than
money—typically by retaining a continuing equity stake in the surviving entity
while the minority common stockholders are cashed out.81 The “continuing stake”
cases by definition involve acquisition transactions, a scenario not applicable here.
GAMCO argues that this is a “unique benefit” case. In a “unique benefit”
case, “the controller receives some sort of special benefit not shared with the other
stockholders.”82 In essence, “the controller extracts something uniquely valuable
79
Id. at *12–14.
80
See, e.g., In re Tele-Communications, Inc. S’holder Litig., 2005 WL 3642727, at *7
(Del. Ch. Jan. 10, 2006) (class of high-vote stock received $376 million more in
consideration than the single-vote stock).
81
See, e.g., In re John Q. Hammons Hotels Inc. S’holders Litig., 2009 WL 3165613, at
*7–8 (Del. Ch. Oct. 2, 2009) (a 72% controller of an acquired company received a
combination of a small equity stake in the surviving entity, significant liquidation rights,
a large line of credit, and various other contractual rights, while other stockholders
received only cash).
82
Crimson, 2014 WL 5449419, at *13.
42
to the controller, even if the controller nominally receives the same consideration
as all other stockholders.”83 GAMCO has seized upon a line of cases in which
Delaware courts have applied entire fairness when a controller causes a company
to enter into a transaction for the purpose of addressing an acute liquidity crisis
confronting the controller. In these cases, while the controller receives the same
financial benefit as the other stockholders, it also receives the “unique benefit” of a
quick infusion of cash that it requires to satisfy its need for liquidity.84
In New Jersey Carpenters Pension Fund v. infoGROUP, Inc.,85 for example,
infoGROUP’s largest stockholder, who was also its founder and Chairman of the
Board, had a unique and desperate need for liquidity based on a variety of factors
including past legal actions and a desire to launch a new business.86 Through “a
pattern of threats and bullying,”87 the plaintiffs alleged that the controller was able
to force a sale of the company “at an inopportune time and utilizing a flawed and
inadequate sales process,” which ultimately resulted in the stockholders receiving
83
Id.
84
See N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888 (Del. Ch.
Oct. 6, 2011); In re Answers Corp. S’holders Litig., 2012 WL 1253072, at *1–2, *7 (Del.
Ch. Apr. 11, 2012); McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000).
85
2011 WL 4825888 (Del. Ch. Sept. 30, 2011).
86
Id. at *2–3.
87
Id. at *3.
43
an unfair price for their shares.88 Based on the extreme facts alleged, the Court
held that it was appropriate to require the defendants to prove the entire fairness of
the transaction because the controller was interested in the transaction, exercised
his position of control over the board to force it to provide him with a unique
benefit (the liquidity he desperately needed) and tainted the sales process in a
manner that ultimately resulted in an unfair price to the minority stockholders.89
infoGROUP is an extreme case. 90 As Chief Justice Strine, writing as
Chancellor, noted in In re Synthes, Inc. S’holder Litig.,91 there are “very narrow
circumstances in which a controlling stockholder’s immediate need for liquidity
could constitute a disabling conflict of interest irrespective of pro rata
treatment.”92 “Those circumstances would have to involve a crisis, fire sale where
88
Id. at *2, *6.
89
Id. at *7.
90
As GAMCO correctly points out, infoGROUP does not stand alone as a case where this
Court has recognized that the pursuit of a transaction to address a controller’s liquidity
need can yield a legally significant unique benefit for the controller. See, e.g., Answers
Corp., 2012 WL 1253072, at *1–2, *7 (describing why the allegedly interested entity had
a liquidity need that was unique, why a cash sale was necessary for monetization, why an
immediate sale was necessary, that the interested entity had in fact sought a fast sale and
had threatened to fire Answers Corp.'s entire management team unless a sale was
completed in short order); McMullin, 765 A.2d at 921 (describing how the controlling
stockholder unilaterally negotiated the transaction, placed cash restrictions on potential
bidders, and sacrificed value in the transaction which might have been realized if the
transaction had been timed or structured differently).
91
50 A.3d 1022 (Del. Ch. 2012).
92
Id. at 1036.
44
the controller, in order to satisfy an exigent need. . . agreed to a sale of the
corporation without any effort to” engage in a sales process that would reflect the
market value.93 In a footnote, the court cited infoGROUP as a case where the facts
reflected the kind of “narrow circumstances” in which a liquidity need would
create a “unique benefit” for the controller—a case where a “controller forced a
sale of the entity at below fair market value in order to meet its own idiosyncratic
need for immediate cash, and therefore deprived the minority stockholders of the
share of value they should have received had the corporation been properly
marketed in order to generate a bona fide full value bid, which reflected its actual
market value.”94
Synthes did not go out on a limb; it applied the teaching of Sinclair Oil and
its progeny,95 where our Supreme Court held that when the controller “receive[s]
nothing [in a transaction]. . . to the exclusion of [the] minority stockholders,” the
business judgment rule is the proper standard by which to evaluate the board’s
decision to approve the transaction even though the plaintiff alleged that the
controller acted out of a “need for large amounts of cash.”96 In so holding, the
93
Id.
94
Id.
95
See Synthes, 50 A.3d at 1034 (citing Sinclair Oil).
96
Sinclair Oil, 280 A.2d at 719, 721–22. Indeed, as the Defendants point out, if a
controller permits a dividend, in any case, that means it wants and likely needs the cash.
45
Supreme Court observed that “[t]he motives for causing the [board to proceed with
the transaction] are immaterial unless the plaintiff can show that the dividend
payments resulted from improper motives and amounted to waste.”97
2. The Complaint Does Not Plead the Kind of “Narrow
Circumstances” That Would Justify Entire Fairness Review
The facts of this case line up nicely with Synthes and Sinclair Oil. Unlike
infoGROUP, or the other one-sided conflicted controller transactions where this
Court has determined that a liquidity need caused a controller to exact a legally
significant unique benefit to the detriment of the minority, the allegations here do
not support a reasonable inference that the iHeart Defendants were competing with
the minority common stockholders by sacrificing value either through threats, a
flawed sales process, or an unfair price. As noted, GAMCO acknowledges that
each of the challenged transactions were arms-length transactions with third
parties. The Complaint’s conclusory allegations that the transactions were
“perpetrated to benefit the iHeart Defendants,” “needless,” and undertaken “at
suboptimal prices” and “on Defendants’ timetable to fund the iHeart Defendants”98
are not only lacking in factual support, they are a far cry from the “very narrow
circumstances” where this Court will find that an arms-length transaction with a
97
Id.
98
Compl. ¶¶ 4, 5.
46
third party yielded the kind of unique benefit to a controller that would justify
entire fairness review.
The most GAMCO could muster as specific criticism of the Asset Sales
process was an allegation that CCOH agreed to a $1.5 million reduction in the
purchase price of assets sold to Lamar Advertising Company, in part so that it
could rely on a REIT exemption from Hart-Scott-Rodino review. 99 While
GAMCO characterizes this fact as evidence that the process was rushed so the
proceeds could quickly be swept to the iHeart Defendants, the relatively modest
accommodation on price hardly reflects the kind of “fire sale” that has prompted
this Court to deny a board of the otherwise applicable business judgment
presumption.100 Indeed, the Asset Sales generated $602 million in cash, twelve
times the 2015 OIBDAN for the assets and significantly higher than CCOH’s own
trading multiple.101 CCOH’s financial advisers believed the process and price were
fair and the Board concluded “that, separate and apart from [iHM’s] liquidity
position, such transactions are in the best interest of [CCOH] and all of its
99
Compl. ¶ 97.
100
See Synthes, 50 A.3d at 1036 (noting that the “sort of uncommon scenario” where the
Court would review for entire fairness would only arise where the plaintiff made “well-
pled” allegations of “a crisis, fire sale where the controller, in order to satisfy an exigent
need (such as a margin call or default in a larger investment) agreed to a sale of the
corporation without any effort to make logical buyers aware of the chance to sell, give
them a chance to do due diligence, and to raise the financing necessary to make a bid that
would reflect the genuine fair market value of the corporation.”).
101
Compl. ¶ 93.
47
stockholders in light of the prices offered by the bidders for such non-core
assets.”102
GAMCO’s allegations regarding the Note Offering fare no better. Besides
summarily observing that the Note Offering will cause CCOH to incur substantial
interest expense at an “over-market” rate without lowering the balance on the
Revolving Note, and that it serves no rational business purpose, 103 allegations that
are conclusory and of no inferential value, the Complaint alleges nothing that
would support the notion that the Note Offering was of the nature of a fire sale that
created a unique benefit for the iHeart Defendants to the detriment of CCOH and
its stockholders.
Moreover, even though GAMCO oft-repeats the conclusory allegation that
the CCOH Board focused only on a need to provide liquidity to the iHeart
Defendants,104 and gave no consideration to the potential benefits or detriments to
CCOH or the other stockholders that might flow from the challenged transactions,
these allegations are undercut by the Board minutes to which GAMCO has cited
which reveal that the Board in fact considered and discussed the negative
consequences for CCOH should the iHeart Defendants be forced into
102
Compl. Ex. H (Jan. 4, 2016 Meeting Minutes) at CCOH000848.
103
Compl. ¶¶ 82–91.
104
Compl. ¶¶ 1, 83, 99, 132, 137.
48
bankruptcy.105 Additionally, the Board minutes reflect that the Board identified
and considered benefits from the transactions apart from avoiding liquidity
problems for the iHeart Defendants, including the optimization of non-core assets
for the benefit of stockholders.106
GAMCO has failed to plead the sort of extraordinary facts that would allow
a reasonable inference that the iHeart Defendants extracted a unique benefit from
CCOH at the expense of the other CCOH stockholders. The Asset Sales, Note
Offering and related dividends, therefore, are subject to business judgment
review. 107 Because the Complaint fails to plead facts that overcome the
105
See Compl. Ex. E (Nov. 30, 2015 Meeting Minutes) at CCOH000663 (“At the request
of the Board, Kirkland discussed with the Board how a bankruptcy filing at Parent could
potentially impact that Company . . . .”); Compl. Ex. H (Jan. 4, 2016 Meeting Minutes) at
CCOH000848 (the Board discussed “the potential costs [CCOH] is likely to incur if
[iHM] encounters a liquidity problem”).
106
Compl. Ex. H (Jan. 4, 2016 Meeting Minutes) at CCOH000848 (“[I]t is Company
management’s belief that, separate and apart from parent’s liquidity position, such
transactions are in the best interest of the Company and all of its stockholders in light of
the prices offered by the bidders for such non-core assets.”) (“[M]embers of the Board
expressed their view that each of the Transactions appear to enable the Board to operate
the business appropriately for all stockholders, including in light of the potential costs the
company is likely to incur if Parent encounters a liquidity problem. Members of the
Board further expressed their initial view that each of the [Transactions] enable the
Company to optimize the overall productivity of its assets.”).
107
Since the controlling stockholder was not conflicted, “even if it appointed a majority
of the Board, that fact is not relevant to determining the directors’ independence or
interestedness in this transaction.” Crimson, 2014 WL 5449419, at *21. If the controller
is not conflicted as to the transactions, then Board members associated with the controller
would not be interested in the transaction in a manner that would strip them of the
presumption of the business judgment rule absent separately-pled board-level interests in
the transactions not alleged here. I have not reached the Defendants’ argument that
49
presumption of the business judgment rule, GAMCO has failed to plead a viable
claim for breach of fiduciary duty. 108 And because the claims for breach of
fiduciary duty must be dismissed, GAMCO’s claim for aiding and abetting
breaches of fiduciary duty (Count III) must also be dismissed.109
E. GAMCO Has Failed to State a Claim for Unjust Enrichment
GAMCO’s unjust enrichment theory is that the iHeart Defendants and
Private Equity Defendants enriched themselves at the expense of CCOH and its
minority stockholders through the Revolving Note, the Note Offering, and the
Asset Sales. This exact theory, “simply couched in fiduciary duty terms,” forms
the basis of GAMCO’s fiduciary duty claims against the Defendants.110 Therefore,
“it is fair to say that the unjust enrichment claim depends per force on the breach
GAMCO has failed to plead non-exculpated claims against the independent directors,
Tremblay, Temple and Jacobs, because I have concluded that GAMCO has not pled
actionable breach claims against any of the Board members.
108
See Sinclair Oil, 280 A.2d at 721–22 (holding that plaintiff failed to plead a claim for
breach of fiduciary duty by failing to plead “that the dividend payments resulted from
improper motives or waste”).
109
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (stating the four elements of
a claim for aiding and abetting a breach of fiduciary duty are: (1) the existence of a
fiduciary relationship, (2) a breach of the fiduciary’s duty, (3) knowing participation in
that breach by defendants, and (4) damages proximately caused by the breach) (internal
citations omitted); see also In re KKR Fin. Hldgs LLC S’holder Litig., 101 A.3d 980,
1003 (Del. Ch. 2014) (“An aiding and abetting claim ‘may be summarily dismissed based
upon the failure of the breach of fiduciary duty claims against director defendants.’”)
(quoting Meyer v. Alco Health Servs. Corp., 1991 WL 5000, at *2 (Del. Ch. Jan. 17,
1991)).
110
Frank v. Elgamal, 2014 WL 957550, at *31 (Del. Ch. Mar. 10, 2014).
50
of fiduciary duty claim . . .”111 As this Court has said before, “the Court frequently
treats duplicative fiduciary duty and unjust enrichment claims in the same manner
when resolving a motion to dismiss.”112 For this reason, and because the iHeart
and Private Equity Defendants were enriched no more or less than GAMCO,
Count IV of the Complaint must be dismissed.
F. GAMCO Has Failed to State a Claim for Waste
The standard for waste is met if the board’s decision cannot be “attributed to
any rational business purpose.”113 GAMCO has not alleged facts that meet this
high burden because they have not pled facts that allow a reasonable inference that
the challenged transactions were “so one sided that no business person of ordinary,
sound judgment could conclude that the corporation has received adequate
consideration.”114 This is an inference that is difficult to sustain in any case; 115 it is
particularly so here.
The Asset Sales and Note Offering were arms-length transactions that
resulted in pro rata dividends. While GAMCO argues that the CCOH Board gave
111
Id.
112
Id.
113
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006).
114
Id.
115
Espinoza v. Zuckerberg, 124 A.3d 47, 67 (Del. Ch. 2015) (noting that a “rare” set of
facts will create a reasonable inference of waste).
51
no consideration to any benefit that would flow from the transactions to CCOH,
the documents appended to GAMCO’s own Complaint reveal a different story.116
The Board’s decision to approve arms-length transactions for reasonable value that
provided liquidity for a controlling stockholder to which CCOH, for better or
worse, is inextricably tied by stringent contractual arrangements clearly can be
attributed to a rational business purpose. Because GAMCO has not met its burden
to plead facts that if proven would satisfy the standard for waste, Count V of the
Complaint must be dismissed.
III. CONCLUSION
For the foregoing reasons, GAMCO has failed to state viable claims for
breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, unjust
enrichment or corporate waste. Accordingly, Defendants’ Motion to Dismiss the
Complaint with prejudice is GRANTED.
IT IS SO ORDERED.
116
See supra notes 105 and 106.
52