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Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broadcasting System, Inc.

Court of Chancery of Delaware

June 27, 2014

BREVAN HOWARD CREDIT CATALYST MASTER FUND LIMITED, BREVAN HOWARD MASTER FUND, VISIUM CATALYST CREDIT MASTER FUND, LTD., ALJ CAPITAL I, LP, ALJ CAPITAL II, LP, LJR CAPITAL, LP, and CEDARVIEW OPPORTUNITIES MASTER FUND, LP, Plaintiffs,
v.
SPANISH BROADCASTING SYSTEM, INC., Defendant.

Date Submitted: June 10, 2014

Stephen E. Jenkins, Catherine A. Gaul, and Peter H. Kyle, of ASHBY & GEDDES, Wilmington, Delaware, Attorneys for the Plaintiffs.

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 the Defendant.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

This matter is brought by preferred stockholders seeking to enforce rights inherent in their stock. According to the Plaintiffs, the Defendant corporation has breached certain of those rights. The Defendant has moved to dismiss; for the following reasons, that Motion is denied.

I. FACTS

1. The Parties

This action arises out of facts set out in greater detail in a prior proceeding before this Court, Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc.[1] The Defendant here, Spanish Broadcasting System, Inc. ("SBS, " or the "Company"), a Delaware corporation, is "the largest publicly traded Hispanic-controlled media and entertainment company in the United States."[2] SBS owns and operates Spanish-language radio and television stations, produces live concerts and events, and operates a "bilingual Spanish-English online site providing content related to Latin music, entertainment, news and culture."[3]

The Plaintiffs in this action are current holders of the Company's Series B Preferred Stock ("Series B"). Brevan Howard Credit Catalyst Master Fund Ltd. and Brevan Howard Master Fund (collectively, "Brevan") together hold 16, 000 shares of Series B, at least some of which were purchased after October 15, 2013. Cedarview Opportunities Master Fund, LP ("Cedarview") holds 1, 500 shares of Series B, all purchased after October 15, 2013. ALJ Capital I, LP; ALJ Capital II, LP; and LJR Capital, LP (collectively, "Capital") together hold 5, 000 shares of Series B; the Amended Complaint indicates that Capital acquired their shares no later than October 11, 2013.[4] Visium Catalyst Credit Master Fund, Ltd. ("Visium") owns 4, 902 shares of Series B; the Amended Complaint indicates that Visium acquired its shares no later than October 14, 2013.[5]

2. The Series B Certificate

This litigation centers on the contractual rights of SBS's Series B preferred stock. As of October 15, 2013, there were 92, 349 total shares of Series B outstanding. The rights of the holders of Series B preferred stock are delineated in the Certificate of Designations Setting Forth the Voting Power, Preferences and Relative, Participating, Optional and Other Special Rights and Qualifications, Limitations and Restrictions of the 10 3/4% Series B Cumulative Exchangeable, Redeemable Preferred Stock of Spanish Broadcasting System, Inc. (the "Certificate"). Though an equity investment, the rights associated with the Series B preferred cause those securities to function much like debt instruments. For one, the Series B preferred are designed to pay to their holders a minimum annual return by issuance of a dividend, which accrues daily and is "payable quarterly in arrears on October 15, January 15, April 15, and July 15 of each year."[6] In addition, because the Series B preferred were issued to finance acquisitions at a time when the Company did not have much cash on hand, [7] the Certificate provided the Company an option, on or before October 15, 2008, to pay dividends to the Series B holders "in kind"—in other words, to "pay dividends in cash or in Dividend Shares."[8] As a result, the Company retained an option, in the first five years after the Series B issuance, to satisfy its dividend obligation by issuing additional Series B shares, although the newly issued shares would themselves accrue dividends going forward. Further, the Certificate granted the Company the option in those first five years, on or before October 15, 2008, to "exchange all but not less than all of the then outstanding shares of Series B Preferred Stock for . . . Exchange Notes to be issued under an indenture . . . ."[9]

Finally, central to the dispute before me here, the Series B preferred also function like debt instruments by providing what may be likened to a maturation date. For example, Section 6 of the Certificate provides that, "[o]n or after October 15, 2008, Series B Preferred Stock may be redeemed . . . at any time, in whole or from time to time in part, at the option of the Company . . . ."[10] The Company has never exercised such a right. However, Section 7 of the Certificate further provides holders of Series B shares the right, on October 15, 2013, to require the Company to repurchase their shares under certain circumstances described in more detail below. Under the terms of the Certificate, in the event "the Company fails to discharge any redemption or repurchase obligation with respect to the Series B Preferred Stock (whether or not the Company is permitted to do so by the terms of the Senior Credit Facilities, the Senior Subordinated Notes, the DGCL, or any other obligation of the Company), "[11] a Voting Rights Triggering Event ("VRTE") occurs, and, as a result, the holders of Series B receive certain rights, including rights to fill seats on the Company's board of directors and to block the Company's incurrence of certain debt.

3. The Series B Repurchase Right

As noted above, Section 7 of the Series B Certificate grants holders of Series B, on October 15, 2013, the right to require the Company to repurchase some or all of their shares, subject to certain limitations. On October 15, 2013, of the 92, 349 shares of Series B outstanding, holders of virtually all of the shares—92, 233— sought to exercise their repurchase rights. In response, the Company repurchased 1, 800 shares for approximately $2.5 million, but took the position that it lacked sufficient "legally available funds" to repurchase additional shares. SBS acknowledged in an October 17, ...


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