In Re BHC Communications, Inc. Shareholder Litigation

Citations: 789 A.2d 1; 2001 Del. Ch. LEXIS 78; 2001 WL 640379Docket: C.A. 18209, C.A. 18218

Court: Court of Chancery of Delaware; June 4, 2001; Delaware; State Appellate Court

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Consolidated actions arise from merger agreements involving three Delaware corporations. Plaintiffs, representing minority stockholders of two subsidiaries, allege breach of fiduciary duty against the parent corporation and the subsidiary directors who approved the mergers. The mergers were approved on April 24, 2001, and are pending regulatory approval. Defendants have moved to dismiss the complaints for failure to state a claim. 

The court emphasizes the importance of the business judgment rule in Delaware corporate law, stating that claims lacking factual allegations to rebut this presumption should typically be dismissed. However, due to the unique circumstances of these cases, the court conditionally denies the motions to dismiss, allowing for limited discovery before reconsideration. Additionally, the court examines exculpatory provisions under Section 102(b)(7) of the Delaware General Corporation Law, which protect directors from duty of care claims unless plaintiffs demonstrate bad faith or disloyalty. As the complaints only allege breaches based on duty of care, they must be dismissed regarding those directors.

Chris-Craft Industries, Inc. is a holding company with majority interests in BHC Communications, Inc. and United Television, Inc., both of which have publicly owned minority interests. On August 14, 2000, News Corporation agreed to acquire Chris-Craft, BHC, and UTV through several merger agreements involving cash and securities. This decision followed a 1999 FCC rule change allowing ownership of multiple television stations in the same market, which prompted interest from various companies, including CBS Corporation, Viacom Inc., and News Corporation. Chris-Craft hired Allen & Company as a financial advisor in September 1999 and advised BHC and UTV to form special committees of outside directors to monitor potential transactions. These committees became active in mid-2000, hiring their own legal and financial advisors and expanding their charters to evaluate acquisition proposals.

Throughout June and July 2000, negotiations occurred between Chris-Craft and Viacom regarding an acquisition. On July 24, Chris-Craft informed the special committees of its discussions with Viacom, instructing them to negotiate directly with Viacom, which anticipated simultaneous agreements with all three corporations. However, the details of these negotiations are sparse in the complaints, possibly to downplay the committees' roles. Notably, on August 3, Chris-Craft indicated it would not support any deal that did not involve a complete acquisition of Chris-Craft. Meanwhile, on July 27, News Corporation submitted a higher proposal than Viacom's, leading to serious negotiations between Chris-Craft and News Corporation. On August 10, Chris-Craft disclosed the superior proposal to both Viacom and the special committees.

Viacom terminated discussions with Chris-Craft and indicated it would proceed with a proposed transaction only if Chris-Craft signed a merger agreement that day, which Chris-Craft refused. Consequently, Viacom withdrew its proposal and publicly announced the termination of negotiations. On August 11, 2000, News Corporation's financial advisors submitted acquisition proposals for BHC and UTV to the Special Committees' financial advisors, who were informed during meetings that day and received a draft merger agreement similar to one negotiated with Chris-Craft. The financial advisors conducted due diligence on News Corporation on August 11 and 12. Despite requests for improved financial terms from News Corporation, both were rejected. On August 13, following further meetings, the Special Committees received opinions from their advisors affirming the fairness of the proposed transaction for BHC and UTV shareholders, excluding Chris-Craft. The Committees recommended the transactions to their boards, which approved them on the same day. Chris-Craft's board also approved its merger with News Corporation on August 13. Subsequently, multiple lawsuits were filed by minority stockholders of BHC and UTV, later consolidated. The original complaints were minimal, alleging that the merger terms favored Chris-Craft at the expense of BHC shareholders, that the individual defendants failed to appoint independent negotiators, and that there was unfair dealing due to conflicts of interest. Following the filing of a draft registration statement by News Corporation, the plaintiffs submitted consolidated amended complaints, which closely mirrored the disclosures in the draft but omitted significant factual details.

Omissions in the complaints overlook Chris-Craft's directives to BHC and UTV regarding their responsibility for negotiating transaction terms with Viacom and News Corporation, as well as the efforts of the Special Committees in these negotiations. This is significant because the crux of the allegations is that Chris-Craft abused its dominant position to control negotiations and unfairly benefit its shareholders at the expense of minority shareholders in BHC and UTV. The complaints challenge the effectiveness of the Special Committees but do not question their independence or authority to reject proposals.

The complaints consist of four counts: 

1. **Count I** alleges breach of fiduciary duty by all defendants for failing to maximize value for minority shareholders, specifically criticizing the lack of an auction or reliable market check for BHC and UTV.
   
2. **Count II** claims that Chris-Craft and its "subservient directors" breached a duty of entire fairness in negotiations that favored Chris-Craft's shareholders over minority shareholders of BHC and UTV, though it does not specify the identities or roles of the directors involved.
   
3. **Count III** alleges that the outside directors of the Special Committees violated their duty of care by approving unfair transaction terms and that other defendants aided these breaches.
   
4. **Count IV** asserts that the individual defendants failed to determine the fair value of BHC and UTV, hindering their ability to inform minority shareholders adequately about the potential merger with News Corporation.

In adjudicating a motion to dismiss under Court of Chancery Rule 12(b)(6), the court accepts as true the well-pleaded factual allegations in the complaint and may consider relevant documents. Judicial notice will be taken of exculpatory provisions in the certificates of incorporation of BHC and UTV, while the court will not assume the truth of matters reported in the draft registration statement on Form F-4, except as specifically alleged in the complaints.

The draft registration statement is relevant to the case as plaintiffs claim they can infer facts inconsistent with the draft Form F-4, despite the court only accepting reasonable inferences supported by specific allegations. The court examines whether it is reasonable to infer facts not alleged in the complaints that contradict the draft disclosure document. The motion to dismiss by non-Chris-Craft directors of BHC and UTV is based on exculpatory charter provisions under Delaware General Corporation Law Section 102(b)(7), which protects directors from personal liability for duty of care claims unless there is evidence of bad faith or disloyalty. Plaintiffs acknowledge that both BHC and UTV have such provisions. The court's review of the complaints reveals that the claims against the non-Chris-Craft directors primarily involve breaches of the duty of care, particularly allegations that they failed to maximize shareholder value and did not conduct an auction for the companies. These claims fall under the protections of Section 102(b)(7). Additional allegations regarding the sale of BHC and UTV being tied to Chris-Craft do not challenge the independence of the directors. The complaints indicate that Chris-Craft made the decision regarding the sale strategy, limiting the directors' ability to independently assess the companies’ values. Count II presents a fairness claim against Chris-Craft and its alleged 'subservient directors,' but lacks specific allegations identifying these individuals or establishing their subservience.

Count II is dismissed against all non-Chris-Craft director defendants, and Count III is dismissed as it pertains to a duty of care violation. Count IV, which elaborates on the duty of care claim, is also dismissed against non-Chris-Craft directors due to lack of sufficient facts indicating a breach beyond mere duty of care. The complaints indicate that the Special Committees engaged with expert advisors and received fairness opinions regarding the News Corporation proposal, supporting the dismissal under Section 102(b)(7) charter provisions.

Regarding the merits-related motions, dismissals should be denied unless it's clear that plaintiffs cannot prevail on any inferred set of facts. The court accepts well-pleaded allegations as true and draws reasonable inferences in favor of the plaintiffs. Chris-Craft’s ability to merge or sell its control block of BHC shares for a control premium does not imply a breach of fiduciary duty to minority shareholders of BHC or UTV. Similarly, while selling BHC would invoke fiduciary duties to its minority shareholders, the board's decision would typically fall under the business judgment rule. 

For a breach of fiduciary duty claim against Chris-Craft, plaintiffs would need to show that its interests diverged from those of the minority shareholders during the transaction approval process. If aligned, Chris-Craft's support would reinforce the application of the business judgment rule. Plaintiffs contend that the business judgment rule does not apply, asserting that Chris-Craft and its representatives on the BHC and UTV boards had conflicting interests detrimental to minority shareholders and engaged in self-dealing by securing favorable terms for Chris-Craft at the expense of minority stockholders.

Plaintiffs allege self-dealing by arguing that News Corporation’s payment limitations affected the consideration for minority shareholders of BHC and UTV, as Chris-Craft negotiated terms that favored its own shareholders. They contend that Chris-Craft finalized agreements for BHC and UTV prior to News Corporation's offers, claiming that the Special Committees merely approved these terms without effective negotiation. While the premium paid for Chris-Craft compared to BHC and UTV does not inherently indicate wrongdoing, if the plaintiffs' claims are substantiated by factual allegations or reasonable inferences, the motions to dismiss should be denied. The BHC and UTV complaints detail the merger's background and negotiations, revealing no factual allegations of Chris-Craft discussing terms with Viacom or News Corporation, focusing instead on Chris-Craft's own acquisition terms. Both complaints claim that Chris-Craft, with the Individual Defendants' consent, controlled the negotiations in a manner that disadvantaged BHC's minority shareholders. The effectiveness of the Special Committees is challenged, and the distinction between alleging facts and asserting reasonable inferences is emphasized, as the court must accept well-pleaded facts as true while only drawing reasonable inferences from those facts. Compliance with Court of Chancery Rule 11(b)(3) will lead to stricter scrutiny on factual allegations compared to inferential claims.

Concluding that the allegations in paragraphs 54 to 65 of the BHC complaint (and 51-61 of the UTV complaint) are more in the realm of inference or legal conclusion rather than established facts warrants granting the motions to dismiss. The well-pleaded allegations suggest that Chris-Craft did not negotiate the price terms of the transactions in question, and any potential conflict was mitigated by the Special Committees' operation. Notably, the plaintiffs did not challenge the independence of the Special Committee members or their advisors. However, allegations that Chris-Craft had 'exclusive control' over negotiations and dictated transaction terms, if accepted as true, would allow the complaints to state a claim for relief against Chris-Craft. Despite this conclusion, there are significant concerns about the validity of these allegations, particularly due to the complaints' heavy reliance on a draft registration statement from News Corporation, which raises questions about the plaintiffs' good faith in asserting their claims. To address these concerns, the denial of the motions to dismiss will be conditioned on strict limitations to the plaintiffs' initial discovery, which must conclude by October 19, 2001. This discovery will focus on how News Corporation negotiated the merger price terms and whether Chris-Craft had any dictation or control over them. Initial written discovery will target Chris-Craft, its advisors, and News Corporation, followed by limited depositions of up to four knowledgeable individuals. Further discovery will require a motion for leave, or it will be considered closed. Additionally, the director defendants affiliated with the parent company have not moved to dismiss on the basis of exculpation, which will not be addressed, although it is noted that they merely approved the mergers based on Special Committee recommendations. The allegations referenced come from the BHC stockholder complaint, and the UTV complaint, while similar, omits certain factual allegations found in the BHC complaint.

Both complaints primarily rely on the disclosures from the same draft registration on Form F-4 filed by News Corporation, making the minor editorial differences between them legally insignificant. The BHC complaint mentions that Chris-Craft's legal and financial advisors emphasized non-interference with negotiations pertaining to BHC and UTV stockholders, a point absent from the UTV complaint. Additionally, the complaints do not address the subsequent negotiations between the Special Committees and Viacom detailed on page 52 of the Form F-4. The BHC complaint alleges that Viacom's advisors provided a draft merger agreement to the BHC Special Committee, a claim not made by the UTV complaint.

The final registration statement has been distributed to BHC and UTV stockholders, but plaintiffs have not amended their complaints to allege any violations related to this document. Key allegations in the complaints include: (i) the Special Committees' mandates were overly restrictive; (ii) Chris-Craft controlled information flow; (iii) committee members lacked timely updates on negotiations; (iv) members were excluded from negotiations until key details were settled; (v) Chris-Craft hindered attempts to explore stand-alone sales; and (vi) Chris-Craft exerted undue pressure on the Special Committees, impeding their ability to meet fiduciary duties.

The BHC board comprises eight members, four of whom are linked to Chris-Craft, while the other four include individuals with no ties to Chris-Craft and former Chris-Craft officers. The UTV board consists of seven members, with four affiliated with Chris-Craft and three serving on the UTV Special Committee. The authenticity of the BHC and UTV certificates of incorporation is acknowledged, and judicial notice will be taken of their terms. The BHC plaintiffs assert that defendants Kashdin and Greene lack independence from Chris-Craft.

Kashdin’s prior role as a senior officer at Chris-Craft and Greene’s consultancy position at BHC are insufficient to question their independence. Established legal precedents affirm the acceptance of control premiums by shareholders and assert that directors are presumed to act on an informed basis, in good faith, and in the company’s best interests. Challenging a board's decision requires overcoming this presumption. The subsidiary board can justifiably rely on the majority shareholder for initial negotiations. It is reasonable to deduce that News Corporation's acquisition of Chris-Craft was contingent upon acquiring BHC and UTV as well. Furthermore, Chris-Craft’s interests in negotiating terms for BHC and UTV diverged from those of the minority shareholders of those companies, as Chris-Craft's stockholders would not benefit from the other two mergers. However, it is not accurate to conclude that Chris-Craft’s interests were directly opposed to those of the minority shareholders.