Liberty Media Wins Approval Of Split Off

In affirming an April Chancery Court decision, the Delaware Supreme Court decided that a proposal by Liberty Media Corp. to split off some of its assets does not violate a successor obligation agreement with bondholders that prevents the media conglomerate from disposing “substantially all of its assets.” The Bank of New York Mellon Trust Co., N.A., v. Liberty Media Corp., 284.

In July 2010, Liberty Media proposed to split off several businesses allocated to its Capital Group and Starz Group into a new public entity, dubbed SplitCo. Liberty, an Englewood, CO, conglomerate run by billionaire John Malone, planned to transfer Starz Entertainment, Starz Media, Liberty Sports Interactive, the Atlanta Braves, True Position Inc. and Liberty's interest in Sirius XM. The assets have a book value of $9.1 billion, or 15% of Liberty's total assets, as of March 2004, according to court documents.

Bank of New York Mellon Trust (BNY Mellon) objected to the move on behalf of an anonymous bondholder, who alleged that the split off (when combined with three previous transactions) was a disaggregation strategy designed to remove substantially all of Liberty's assets from which bondholders have claims and transfer them into the hands of stockholders.

The three previous transactions included Liberty's 2004 spin off of Liberty Media International Inc., which held Liberty's controlling interest in several international cable companies; the 2005 spin-off of its holdings in the Discovery Cable channel; and the split off of Liberty's stake in DirecTV. In total, the three assets had a book value of $31.8 billion.

Liberty brought suit for declaratory and injunctive relief against BNY Mellon in its capacity as indenture trustee. Chancery Court Vice Chancellor J. Travis Laster applied the “step-transaction” doctrine, which the state supreme court in its subsequent decision described as treating “the 'steps' in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan.”

In ruling in favor of Liberty, Vice Chancellor Laster had written in his opinion that the SplitCo proposal should not be aggregated with the three prior Liberty transactions and therefore is “not part of a master plan to strip Liberty's assets out of the corporate vehicle subject to bondholder claims.” Laster noted: “Each of the transactions resulted from a distinct and independent business decision based on the facts and circumstances that Liberty faced at that time.” Liberty Media Corp. v. The Bank of New York Mellon Trust Co., N.A., 5702.

In its appeal to the Delaware Supreme Court, BNY Mellon argued that Laster's “adoption of the legally irrelevant step-transaction doctrine is not supported by the plain language of the indenture and is inconsistent with the indenture's actual language, which forbids disposition of substantially all of Liberty's assets through a series of transactions.” Furthermore, BNY Mellon alleged that even if there was some basis for the chancery court to look beyond the indenture's plain language, there is no evidence indicating that Liberty intended to incorporate the step-transaction doctrine into the indenture's successor obligation provision.

In rejecting Mellon's arguments, Delaware Supreme Court Justice Randy J. Holland wrote on behalf of the en banc court: “The Court of Chancery's legal conclusion rests on its factual finding that aggregating the four transactions is not warranted because each transaction was the result of a discrete, context-based decision and not as part of an overall plan to deplete Liberty's asset base over time.”

The state high court opined that Laster's application of the step-transaction doctrine was appropriate under Noddings Investment Group Inc. v. Capstar Communication Inc., 16538, a 1999 Delaware Chancery Court decision that adopted the doctrine. Under the doctrine's “end result test,” it can be invoked if it appears likely that a series of transactions were prearranged parts of a single transaction designed to achieve the ultimate result of a liquidation.

In the Liberty Media case, the Delaware Supreme Court held that Vice Chancellor Laster correctly evaluated the trial evidence to conclude there was no indication that Liberty had developed a plan to dispose of its assets piecemeal with the goal of evading bondholder claims against those assets. In its opinion, the high court added that because the evidence supports Liberty's claims, the application of the step-transaction doctrine was appropriate.

BNY Mellon also attempted to argue that the phrase “series of transactions” included in the indenture's boilerplate language broadened the scope of the successor obligation provision. The state supreme court said the argument was “not persuasive.” According to the supreme court: “As the Chancery Court properly recognized, it would be inconsistent with the concept of private ordering to expand the scope of the successor obligation provision by rewriting the indenture contract to include by implication additional protections for which the parties could have but did not provide by way of a covenant separate and apart from the boilerplate successor obligor provision.”

In affirming an April Chancery Court decision, the Delaware Supreme Court decided that a proposal by Liberty Media Corp. to split off some of its assets does not violate a successor obligation agreement with bondholders that prevents the media conglomerate from disposing “substantially all of its assets.” The Bank of New York Mellon Trust Co., N.A., v. Liberty Media Corp., 284.

In July 2010, Liberty Media proposed to split off several businesses allocated to its Capital Group and Starz Group into a new public entity, dubbed SplitCo. Liberty, an Englewood, CO, conglomerate run by billionaire John Malone, planned to transfer Starz Entertainment, Starz Media, Liberty Sports Interactive, the Atlanta Braves, True Position Inc. and Liberty's interest in Sirius XM. The assets have a book value of $9.1 billion, or 15% of Liberty's total assets, as of March 2004, according to court documents.

Bank of New York Mellon Trust (BNY Mellon) objected to the move on behalf of an anonymous bondholder, who alleged that the split off (when combined with three previous transactions) was a disaggregation strategy designed to remove substantially all of Liberty's assets from which bondholders have claims and transfer them into the hands of stockholders.

The three previous transactions included Liberty's 2004 spin off of Liberty Media International Inc., which held Liberty's controlling interest in several international cable companies; the 2005 spin-off of its holdings in the Discovery Cable channel; and the split off of Liberty's stake in DirecTV. In total, the three assets had a book value of $31.8 billion.

Liberty brought suit for declaratory and injunctive relief against BNY Mellon in its capacity as indenture trustee. Chancery Court Vice Chancellor J. Travis Laster applied the “step-transaction” doctrine, which the state supreme court in its subsequent decision described as treating “the 'steps' in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan.”

In ruling in favor of Liberty, Vice Chancellor Laster had written in his opinion that the SplitCo proposal should not be aggregated with the three prior Liberty transactions and therefore is “not part of a master plan to strip Liberty's assets out of the corporate vehicle subject to bondholder claims.” Laster noted: “Each of the transactions resulted from a distinct and independent business decision based on the facts and circumstances that Liberty faced at that time.” Liberty Media Corp. v. The Bank of New York Mellon Trust Co., N.A., 5702.

In its appeal to the Delaware Supreme Court, BNY Mellon argued that Laster's “adoption of the legally irrelevant step-transaction doctrine is not supported by the plain language of the indenture and is inconsistent with the indenture's actual language, which forbids disposition of substantially all of Liberty's assets through a series of transactions.” Furthermore, BNY Mellon alleged that even if there was some basis for the chancery court to look beyond the indenture's plain language, there is no evidence indicating that Liberty intended to incorporate the step-transaction doctrine into the indenture's successor obligation provision.

In rejecting Mellon's arguments, Delaware Supreme Court Justice Randy J. Holland wrote on behalf of the en banc court: “The Court of Chancery's legal conclusion rests on its factual finding that aggregating the four transactions is not warranted because each transaction was the result of a discrete, context-based decision and not as part of an overall plan to deplete Liberty's asset base over time.”

The state high court opined that Laster's application of the step-transaction doctrine was appropriate under Noddings Investment Group Inc. v. Capstar Communication Inc., 16538, a 1999 Delaware Chancery Court decision that adopted the doctrine. Under the doctrine's “end result test,” it can be invoked if it appears likely that a series of transactions were prearranged parts of a single transaction designed to achieve the ultimate result of a liquidation.

In the Liberty Media case, the Delaware Supreme Court held that Vice Chancellor Laster correctly evaluated the trial evidence to conclude there was no indication that Liberty had developed a plan to dispose of its assets piecemeal with the goal of evading bondholder claims against those assets. In its opinion, the high court added that because the evidence supports Liberty's claims, the application of the step-transaction doctrine was appropriate.

BNY Mellon also attempted to argue that the phrase “series of transactions” included in the indenture's boilerplate language broadened the scope of the successor obligation provision. The state supreme court said the argument was “not persuasive.” According to the supreme court: “As the Chancery Court properly recognized, it would be inconsistent with the concept of private ordering to expand the scope of the successor obligation provision by rewriting the indenture contract to include by implication additional protections for which the parties could have but did not provide by way of a covenant separate and apart from the boilerplate successor obligor provision.”