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In re Sirius XM Shareholder Litigation

Court of Chancery of Delaware

September 27, 2013


Date Submitted: August 28, 2013

Stuart M. Grant, Esquire, Cynthia A. Calder, Esquire, Mary Thomas, Esquire, GRANT & EISENHOFER, P.A., Wilmington, Delaware; Pamela S. Tikellis, Esquire, Robert J. Kriner, Jr., Esquire, A. Zachary Naylor, Esquire, CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; Mark Lebovitch, Esquire, Amy Miller, Esquire, Stefanie J. Sundel, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs and the Proposed Class.

Donald J. Wolfe, Jr., Esquire, Michael B. Tumas, Esquire, Peter J. Walsh, Jr., Esquire, Brian C. Ralston, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Frederick H. McGrath, Esquire, Richard B. Harper, Esquire, Renee L. Wilm, Esquire, BAKER BOTTS L.L.P., New York, New York; Attorneys for Defendants David J.A. Flowers, Gregory B. Maffei, John C. Malone, Carl E. Vogel, Vanessa A. Wittman, Liberty Media Corporation, and Liberty Radio, LLC.

Raymond J. DiCamillo, Esquire, Scott W. Perkins, Esquire, A. Jacob Werrett, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Bruce D. Angiolillo, Esquire, Paul C. Gluckow, Esquire, SIMPSON THACHER & BARTLETT LLP, New York, New York; Attorneys for Defendants Sirius XM Radio Inc., Joan L. Amble, Leon D. Black, Lawrence F. Gilberti, Eddy W. Hartenstein, James P. Holden, Mel Karmazin, James Meyer, James F. Mooney, and Jack Shaw.


STRINE, Chancellor.

I. Introduction

In 2009, Sirius XM Radio Inc. ("Sirius") — a company that creates and broadcasts subscription-based satellite radio — was struggling. Its stock was trading below $0.15 per share and it was facing an imminent requirement to repay certain outstanding Convertible Notes, which it lacked the cash flow to meet. To stabilize its shaky finances, Sirius negotiated a capital infusion from Liberty Media Corporation ("Liberty Media"). That infusion of $530 million (the "Investment Agreement") gave Sirius time to turn things around by developing new sources of revenue and expanding on-air talent. As nothing in life is free, and particularly not capital infusions into public corporations, Liberty Media received, among other things, preferred stock in Sirius that was convertible into a 40 percent common equity interest.

Although Sirius's board negotiated contractual provisions that limited Liberty Media's ability to take majority control of Sirius for three years, the Certificates of Designations for the preferred stock (the "Certificates of Designations") gave Liberty Media the right to designate directors to the Sirius board in proportion to its equity ownership as well as the right to consent to important corporate actions such as any merger, sale, or recapitalization of Sirius. Most important for present purposes, once the standstill period expired, the Investment Agreement specifically prevented the Sirius board from using a poison pill or any other charter or bylaw provision to interfere with Liberty Media's ability to purchase additional Sirius stock. Thus, under the Investment Agreement, Liberty Media secured the practical ability to take control of Sirius in 2012 without paying a premium to Sirius stockholders by purchasing the additional shares needed to obtain control in the market. The Investment Agreement and its terms were publicly announced on February 17, 2009 and were the subject of numerous disclosures.

Over the next three years, Sirius's financial situation improved, and its stock rose to trade at a price of over $2 per share. When the standstill period expired on March 6, 2012, Liberty Media announced that it intended to acquire majority control of Sirius if it could obtain regulatory approval from the FCC and began purchasing additional stock on the open market. The plaintiffs sued and complained that the Sirius board had breached its fiduciary duties by adhering to the provisions of the Investment Agreement, which precluded them from blocking Liberty Media's acquisition of control with a poison pill or by other means. The plaintiffs also alleged that Liberty Media had breached its fiduciary duties as a controlling stockholder by purchasing shares on the open market to acquire majority control of Sirius without paying a premium.

The defendants have moved to dismiss the complaint, arguing, among other things, that the plaintiffs' claims are time-barred. Their motion to dismiss is granted. The statute of limitations for breach of fiduciary duty is three years. The plaintiffs filed their claims more than three years after the Investment Agreement was signed and publicly disclosed. Reasonable Sirius stockholders were on full notice in 2009 that Liberty Media would be able to acquire majority control without interference from the Sirius board after the standstill period expired in 2012. The plaintiffs have identified no reason why they did not challenge the Investment Agreement within the required limitations period, nor have the plaintiffs identified any action the board could have taken to block Liberty Media that was not specifically foreclosed by the Investment Agreement. The plaintiffs may not sue at this late date, especially given the undisputed reality that Liberty Media put $530 million at risk for over three years by investing in Sirius, in reliance on the contractual consideration it received in return.

The plaintiffs sought to avoid dismissal by claiming that, regardless of the bargain struck in the Investment Agreement in 2009, Liberty Media still owed a duty of fairness at the end of the standstill period in 2012 to only obtain control through a transaction that was approved as fair by the independent Sirius directors. The only act that the plaintiffs point to as a breach of that alleged duty that occurred within the statute of limitations is the fact that Liberty Media purchased shares on the open market to achieve majority ownership. But that is exactly what Liberty Media bargained for in the Investment Agreement before it invested in Sirius — it accepted a restriction on its ability to purchase additional shares for three years and in return, received a commitment that the Sirius board would not interfere with its ability to purchase shares on the open market after the standstill period expired. Thus, although artfully repackaged, this is still an attack on the terms of the Investment Agreement that the board negotiated in 2009. The plaintiffs are therefore only alleging that Liberty Media exercised its contractual right to purchase shares. Absent fraud or the use of material, non-public information to gain an advantage in trades, Delaware's common law of corporations — i.e. equitable fiduciary duty law — does not preclude a stockholder from acquiring a majority stake by making open market purchases. At a time before it had any influence over Sirius, much less any fiduciary obligation to it, Liberty Media gave valuable consideration in exchange for the right to make open market purchases after the standstill period expired. Liberty Media's decision to do so, without more, provides no basis for a cause of action against it.

Of course, it is natural for the plaintiffs to want the company in which they are invested — Sirius — to have all of the upside but none of the downside that comes with real world commercial transactions. But that desire is not indulged by the law, which recognizes that for commercial transactions to facilitate wealth creation, they must be enforced fairly and in a manner that recognizes that both sides gave consideration. Thus, the plaintiffs are not entitled to watch Sirius take over half a billion dollars in capital from Liberty Media, sit on the sidelines benefitting from the investment Liberty Media made in Sirius until after the statute of limitations expires, and then belatedly seek to deprive Liberty Media of the benefits of the contract it received in exchange.

II. Background

In keeping with the procedural setting of a motion to dismiss, the relevant facts are drawn from the plaintiffs' second amended complaint (the "Complaint") and the documents it incorporates.[1] In February 2009, Sirius was struggling to obtain funds to repay certain outstanding Convertible Notes in a frozen credit market and desperately needed an immediate capital infusion to avoid bankruptcy. To weather the storm, Sirius negotiated the Investment Agreement with Liberty Media to provide it with a total of $530 million in loans. In return, Liberty Media received preferred stock convertible to 40 percent of the outstanding shares of Sirius common stock. The Certificates of Designations gave Liberty Media the right to designate directors to the Sirius board in proportion to its equity ownership, which at all relevant times constituted five members of the thirteen-person board.[2] Liberty Media also received the contractual right to consent to certain important corporate actions including any grant or issuance of Sirius equity securities, any merger or sale of all or substantially all of Sirius's assets, any acquisition or disposition of ...

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