No 'Good Cause' Found to Stop Interest Accrual On Value of CKx

CKx Inc., the entertainment company that holds the rights to American Idol and other TV programs, and is involved in litigation over its acquisition by Apollo Global Management LLC, cannot order the challenging shareholder to accept the undisputed portion of the purchase price of its stock, the Delaware Court of Chancery ruled. The court held the company did not meet the “good cause” standard necessary to order the unhappy stock owner to agree to a partial sales price and for the court to stop the accrual of interest on the value of that stock.

Vice Chancellor Sam Glasscock III issued the letter opinion in Huff Fund Investment Partnership v. CKx Inc., 6844. The case made headlines last year when Vice Chancellor Glasscock broke from the Delaware court's tradition of using discounted cash flow (DCF) to determine a company's value. He ruled instead that the $509 million sale price for CKx (now known as CORE Media Group) was the most relevant evaluation because no comparable transactions or reliable cash-flow projections existed.

Last year, an affiliate of Apollo Global Management LLC submitted a bid to purchase CKx for $5.50 per share, while a second suitor, identified in court documents as Party B, offered a $5.60 per share purchase price. Although Party B offered a marginally higher purchase price, CKx's board selected the Apollo offer because its financing was more secure, according to the court's opinion.

But Bryan E. Bloom, a CKx dissenting director, and Huff Fund Investment Partnership, an investment entity that also owned CKx shares, filed a motion for appraisal of the company's stock. In the petition, Bloom and Huff Fund allege that CKx had the ability to obtain increased economic benefits from negotiations with the Fox Network, American Idol 's distributor, therefore increasing CKx's value. An expert witness for the petitioners claimed that, under the DCF valuation model, CKx's stock was worth $11.02 per share. However, CKx's expert witness testified that the DCF analysis valued the company at $4.41 per share.

Typically, the Delaware Chancery Court relies upon the DCF to evaluate a corporation, but Vice Chancellor Glasscock concluded that this was unreliable because no one could accurately predict the outcome of the negotiations with Fox. “Because neither party has presented a reasonable alternative valuation method, and because I find the sales price here a reliable indicator of value, I find that a use of the merger price to determine fair value is appropriate in this matter,” Glasscock said in the November opinion.

CKx responded to the vice chancellor's opinion by ordering the petitioners, Bloom and Huff, to accept a tender offer of $3.63 per share, or $335 million. The company alleged that the $3.63 per share price represents its base value plus accrued interest, according to court documents.

CKx said it is willing to tender that amount in order to stop the accrual of interest while the transaction is stalled by litigation. Under '262(h) of the Delaware General Corporation Law, the interest rate in appraisal actions compounds quarterly at 5.75%, or 5% above the Federal Reserve Bank of the U.S. discounted rate.

In 2007, the Delaware Legislature updated '262(h) to include language that prevented the chancery court from blocking the accrual of interest unless “good cause” is shown. Under prior chancery court rulings, the “good cause” standard is only met in appraisal actions when there is bad faith or vexatious litigation.

Vice Chancellor Glasscock said that he could not order the petitioners to accept the partial purchase price because CKx did not show “good cause.” According to Glasscock: “The limited [court] discretion remaining, to be exercised upon a finding of good cause, permits me to deviate from the statutory formula where a consideration of circumstances at the end of the process ' of which a wide variety might be relevant ' indicates that an award at the statutory rate would be unjust; but not to direct that respondents may avoid the running of interest by prepayment as a matter of right, which is, ultimately, what the Respondent suggests here. While I am sympathetic to the incentives driving this motion, ultimately, I find the relief sought incompatible with the statute.”

CKx countered that good cause exists because Bloom and Huff have “pursued overbroad document and third-party discovery, taken irrelevant depositions and filed multiple unauthorized briefs, all of which have delayed the proceedings.” However, the vice chancellor said that misconduct allegations were not enough to order the petitioners to accept partial payment. “Whether such misconduct has occurred in this case is better evaluated at the conclusion of these proceedings,” he said.

Jeff Mordock is a Reporter for Delaware Business Court Insider, an ALM sibling of Entertainment Law & Finance.

CKx Inc., the entertainment company that holds the rights to American Idol and other TV programs, and is involved in litigation over its acquisition by Apollo Global Management LLC, cannot order the challenging shareholder to accept the undisputed portion of the purchase price of its stock, the Delaware Court of Chancery ruled. The court held the company did not meet the “good cause” standard necessary to order the unhappy stock owner to agree to a partial sales price and for the court to stop the accrual of interest on the value of that stock.

Vice Chancellor Sam Glasscock III issued the letter opinion in Huff Fund Investment Partnership v. CKx Inc., 6844. The case made headlines last year when Vice Chancellor Glasscock broke from the Delaware court's tradition of using discounted cash flow (DCF) to determine a company's value. He ruled instead that the $509 million sale price for CKx (now known as CORE Media Group) was the most relevant evaluation because no comparable transactions or reliable cash-flow projections existed.

Last year, an affiliate of Apollo Global Management LLC submitted a bid to purchase CKx for $5.50 per share, while a second suitor, identified in court documents as Party B, offered a $5.60 per share purchase price. Although Party B offered a marginally higher purchase price, CKx's board selected the Apollo offer because its financing was more secure, according to the court's opinion.

But Bryan E. Bloom, a CKx dissenting director, and Huff Fund Investment Partnership, an investment entity that also owned CKx shares, filed a motion for appraisal of the company's stock. In the petition, Bloom and Huff Fund allege that CKx had the ability to obtain increased economic benefits from negotiations with the Fox Network, American Idol 's distributor, therefore increasing CKx's value. An expert witness for the petitioners claimed that, under the DCF valuation model, CKx's stock was worth $11.02 per share. However, CKx's expert witness testified that the DCF analysis valued the company at $4.41 per share.

Typically, the Delaware Chancery Court relies upon the DCF to evaluate a corporation, but Vice Chancellor Glasscock concluded that this was unreliable because no one could accurately predict the outcome of the negotiations with Fox. “Because neither party has presented a reasonable alternative valuation method, and because I find the sales price here a reliable indicator of value, I find that a use of the merger price to determine fair value is appropriate in this matter,” Glasscock said in the November opinion.

CKx responded to the vice chancellor's opinion by ordering the petitioners, Bloom and Huff, to accept a tender offer of $3.63 per share, or $335 million. The company alleged that the $3.63 per share price represents its base value plus accrued interest, according to court documents.

CKx said it is willing to tender that amount in order to stop the accrual of interest while the transaction is stalled by litigation. Under '262(h) of the Delaware General Corporation Law, the interest rate in appraisal actions compounds quarterly at 5.75%, or 5% above the Federal Reserve Bank of the U.S. discounted rate.

In 2007, the Delaware Legislature updated '262(h) to include language that prevented the chancery court from blocking the accrual of interest unless “good cause” is shown. Under prior chancery court rulings, the “good cause” standard is only met in appraisal actions when there is bad faith or vexatious litigation.

Vice Chancellor Glasscock said that he could not order the petitioners to accept the partial purchase price because CKx did not show “good cause.” According to Glasscock: “The limited [court] discretion remaining, to be exercised upon a finding of good cause, permits me to deviate from the statutory formula where a consideration of circumstances at the end of the process ' of which a wide variety might be relevant ' indicates that an award at the statutory rate would be unjust; but not to direct that respondents may avoid the running of interest by prepayment as a matter of right, which is, ultimately, what the Respondent suggests here. While I am sympathetic to the incentives driving this motion, ultimately, I find the relief sought incompatible with the statute.”

CKx countered that good cause exists because Bloom and Huff have “pursued overbroad document and third-party discovery, taken irrelevant depositions and filed multiple unauthorized briefs, all of which have delayed the proceedings.” However, the vice chancellor said that misconduct allegations were not enough to order the petitioners to accept partial payment. “Whether such misconduct has occurred in this case is better evaluated at the conclusion of these proceedings,” he said.

Jeff Mordock is a Reporter for Delaware Business Court Insider, an ALM sibling of Entertainment Law & Finance.