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Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc.

Court of Chancery of Delaware

February 25, 2014


Submitted: December 19, 2013

Garrett B. Moritz and S. Michael Sirkin, of Seitz Ross Aronstam & Moritz LLP, Wilmington, Delaware; OF COUNSEL: Robert J. Stark, Sigmund S. Wissner-Gross, May Orenstein and Marek Krzyzowski, of Brown Rudnick LLP, New York, New York, Attorneys for Plaintiff Lehman Brothers Holdings Inc.

Matt Neiderman, Gary W. Lipkin and Benjamin A. Smyth, of Duane Morris LLP, Wilmington, Delaware; OF COUNSEL: Kent A. Yalowitz, Tanya E. Kalivas and Grace Chan, of Arnold & Porter LLP, New York, New York, Attorneys for Plaintiff T. Rowe Price High Yield Fund, Inc.

Robert S. Saunders, Nicole A. DiSalvo, Ronald N. Brown, III and Matthew P. Majarian, of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, Attorneys for Defendant Spanish Broadcasting System, Inc.


GLASSCOCK, Vice Chancellor

In this case, the Plaintiffs, equity holders in the Defendant company, invested in preferred stock that accrued dividends daily, which dividends were payable quarterly as and if declared by the company's board of directors. If the dividend was not paid for four consecutive quarters, the Certificate of Designation in connection with the stock provided that a "Voting Rights Triggering Event" (a "VRTE") had occurred, conferring upon the Plaintiffs certain rights, including a right to fill seats on the company board, and to constrain the company from acquiring certain additional debt during the period the dividend arrearage continued. In 2009, the company began to fail to make dividend payments, and- under the Plaintiffs' reading of the Certificate of Designation-a VRTE occurred no later than July 2010. Nonetheless, the Plaintiffs did not assert their rights under the Certificate of Designation at that time. Moreover, when the company's board determined that it needed additional capital and acquired debt in separate, publically-announced transactions in May 2011 and January 2012, the Plaintiffs stood mute. Finally, on February 14, 2013, one of the Plaintiffs filed this suit, contending that a VRTE had occurred in 2010, and therefore the debt transactions of 2011 and 2012 were in breach of its contract rights under the Certificate of Designation. The Plaintiffs seek damages as a result of the breach.

The Defendant contends that the Plaintiffs misread the Certificate of Designation, and that no VRTE occurred in 2010. I need not reach that issue, however, because I find that, assuming that a VRTE did occur, the Plaintiffs, with at least imputed knowledge of both that fact and that the board nonetheless intended to incur additional debt, made no objection to that action, and instead stood by and allowed the breach to occur. Under the particular facts set out below, I find that the Plaintiffs acquiesced to the actions of the company during the time of any VRTE resulting from the failure of the company to pay dividends through July 2010, and the Plaintiffs are therefore not entitled to the relief they seek.


A. The Preferred Stock Offerings

Defendant Spanish Broadcasting System, Inc. ("SBS, " or the "Company") is a Delaware corporation that owns and operates Spanish-language radio and television stations in the United States, generating most of its revenue from the sale of advertising airtime on its twenty-one radio stations and through its television group.[1] Though SBS "is well-positioned to benefit from favorable market demographics, " the Company experienced net losses in 2008 and 2009, and generated only "modest" net income of $15 million in 2010 and $23.7 million in 2011.[2]

SBS currently has two classes of common stock and two classes of preferred stock. SBS initiated a public offering of its first class of preferred stock-Series A Preferred Stock ("Series A")-in 2003, as a way of financing its acquisition of radio station KXOL-FM without incurring additional debt.[3] At that time, SBS, represented by legal counsel Kaye Scholer LLP and financial advisor Sterling Advisors LLC, worked with underwriters Merrill Lynch and Lehman Brothers Inc. ("LBI"), a former affiliate of Plaintiff Lehman Brothers Holdings Inc. ("Lehman"), to organize the Series A offering. The offering was structured such that Series A preferred stock would initially be placed with qualified institutional buyers, and then pursuant to a Registration Rights Agreement, Series A shares would eventually be exchanged for shares of Series B Preferred Stock ("Series B") in a registered offering, with Series B trading in the secondary market. Though an equity offering, SBS and its underwriters approached the offering as a debt alternative, "described in debt-like terms, " marketed to SBS's existing bondholders and providing what essentially functioned as a maturation date on which date the preferred stockholders could require SBS to repurchase the preferred shares.[4]

The terms of the Series A offering were initially set out in drafts of the offering memorandum, created by LBI and modified by SBS's legal counsel, and ultimately delineated in the Series A Certificate of Designation. The SBS board approved the filing of the Series A and Series B Certificates of Designation on October 15, 2003, and those Certificates were authorized by resolution via a unanimous written consent dated October 28, 2003.[5] On October 30, 2003, LBI, Merrill Lynch, and Deutsche Bank, acting as underwriters, acquired 75, 000 shares of Series A to place with qualified institutional buyers, including with Plaintiff T. Rowe Price. The underwriters did not retain any of the Series A shares.

In February 2004, SBS filed a registration statement with the Securities and Exchange Commission in connection with its plan to permit investors to exchange shares of Series A for freely-transferable shares of Series B. The T. Rowe Price funds that had acquired Series A shares fully participated in the conversion to Series B shares, and between 2004 and 2008, T. Rowe Price acquired additional shares of Series B on the secondary market totaling 13, 200 shares, or roughly 14% of shares outstanding.[6] In addition, LBI acquired over 35, 000 shares of Series B on the secondary market; as of September 2012, that stake represented roughly 38% of the 92, 349 total shares of Series B outstanding.[7] In September 2008, LBI entered bankruptcy, and its shares of Series B were held by JP Morgan Chase as security for clearing and settlement services. In March 2010, Plaintiff Lehman became subrogated to JP Morgan's rights in the Series B shares, and in March 2012, Lehman emerged from bankruptcy.[8]

B. The Series B Certificate of Designation

According to the Certificate of Designation, Series B stockholders receive dividends "when, as and if declared by the Board of Directors, " accruing at an annual rate of 10.75%.[9] These dividends accrue on a daily basis and are "payable quarterly in arrears on October 15, January 15, April 15, and July 15 of each year."[10]

This action involves a disagreement about the interpretation of a provision included in the Series B Certificate of Designation (the "Certificate"), which defines a Voting Rights Triggering Event: the VRTE. That provision states:

If . . . at any time, dividends on the outstanding Series B Preferred Stock are in arrears and unpaid (and in the case of dividends payable after October 15, 2008, are not paid in cash) for four (4) consecutive quarterly dividend periods . . . the number of directors constituting the Board of Directors of the Company will be adjusted to permit the holders of the majority of the then outstanding Series A Preferred Stock and Series B Preferred Stock, voting together as one class, to elect two directors.[11]

Where a VRTE has occurred such that the preferred stockholders' voting rights have vested, "a proper officer of the Company shall, upon the written request of holders of record of 10% or more of the then-outstanding Series A Preferred Stock and Series B Preferred Stock . . . call a special meeting of holders" in order to fill the two board seats due to the preferred stockholders upon the occurrence of a VRTE.[12] If, after 30 days of receipt of the written request, the Company fails to hold a special election, then preferred stockholders owning 10% or more of the outstanding shares may themselves "call such meeting at the expense of the Company."[13]

In addition, where a VRTE has occurred, SBS is prohibited from incurring certain additional debt, and if SBS wishes to incur new debt, it must either pay its arrearages or obtain a ...

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