Bank of New York Mellon Trust Co. v. Liberty Media Corp.: Delaware Supreme Court Applies New York Law to “Substantially All” Provision of Indenture and Declines to Aggregate Series of Dispositions

October 31, 2011

Publication| Corporate Transactions| Corporate & Chancery Litigation

In Bank of New York Mellon Trust Co. v. Liberty Media Corp., No. 284, 2011 (Del. Sept. 21, 2011), the Delaware Supreme Court held that the split-off of the Capital and Starz business groups (the “Capital Split-off”) following three other major distributions of assets since 2004 did not constitute a transfer of “substantially all” of the assets of Liberty Media Corporation and its wholly owned subsidiary, Liberty Media LLC (together, “Liberty”), under the terms of an indenture. 

Shortly after the Capital Split-off was announced, Liberty received a letter from an anonymous bondholder alleging that Liberty had pursued a “disaggregation strategy” designed to shift substantially all of the assets against which the bondholders have claims into the hands of Liberty’s stockholders in violation of an indenture dated July 7, 1999 (the “Indenture”). In response, Liberty commenced an action against The Bank of New York Mellon Trust Company, N.A., as trustee under the Indenture (the “Trustee”), seeking injunctive relief and a declaratory judgment that the proposed Capital Split-off would not constitute a disposition of “substantially all” of Liberty’s assets in violation of the Indenture. While all parties agreed that, considered in isolation, the Capital Split-off would not constitute a transfer of substantially all of Liberty’s assets, the Capital Split-off would be Liberty’s fourth major distribution of assets since March 2004 and the Trustee argued that the Capital Split-off should be aggregated with the prior dispositions by Liberty in determining whether “substantially all” of Liberty’s assets had been transferred. 

In the underlying proceeding, the Court of Chancery held that the Capital Split-off and the three other major distributions of assets should not be aggregated. Applying New York law, which governed the Indenture, Vice Chancellor Laster concluded that the Capital Split-off was not “sufficiently connected” to the prior transactions to warrant aggregation, noting the seven-year period over which the dispositions occurred, the different facts and circumstances surrounding each disposition, and that each disposition resulted from an independent decision by Liberty rather than “a plan to engage in seriatim distributions that would remove the assets from Liberty’s corporate form and evade the bondholders’ claims.” In so holding, the Court of Chancery relied on the Second Circuit’s 1982 decision in Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982). Additionally, Vice Chancellor Laster applied the “step-transaction doctrine” in determining not to aggregate the dispositions. Under the step-transaction doctrine, dispositions are to be aggregated if the dispositions are (i) prearranged parts of a single transaction intended to achieve the ultimate result, (ii) so interdependent as to be fruitless without the series, or (iii) pursuant to a prearranged and binding commitment to undertake the later steps. With none of these conditions satisfied, the Court of Chancery held that the dispositions should not be aggregated. 

The Delaware Supreme Court affirmed the decision based on the Court of Chancery’s application of the principles outlined in Sharon Steel. However, the Supreme Court concluded that it was unnecessary to determine whether the step-transaction doctrine would be adopted as New York law in a similar analysis because the legal conclusions would have been the same under an independent reading ofSharon Steel.

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