In Re Tele-Communications

Summary

Lawsuit over AT&T's 1999 acquisition of TCI

TCI had dual class voting stock
In the merger, 10-vote stock was paid a
10% premium over what 1-vote stock was paid

Delaware Chancery denies defendants'
summary judgment motion

Opinion 12.21.05 below
Disparate holdings of 10-vote stock conflicted TCI directors

So that entire fairness standard applied

Record suggests several process flaws, so that
special committee didn't satisfy fair dealing requirement
Special committee:

Didn't have a clear mandate
Choice of its members was suspect

Advisors weren't independent
Didn't get complete information
Didn't engage in arms length bargaining
See Fair Dealing Issues below

Fair price requirement may not have been met

Special committee and its advisors failed to separately examine the fairness of the 10% premium
See Fair Price Issues below

Proxy statement disclosures were inadequate

Plan to "reasonably compensate" special committee members was approved at outset but not disclosed
Both special committee members were later paid $1 million
See Proxy Statement Disclosures below

Settled for $52 million on eve of trial 10.13.06

Plaintiffs had made claims for $275 million

Issues raised

Should holders of high-vote stock ever seek a premium?

Often waived by such holders to avoid litigation risk
Even though not strictly required

Would better optics been enough to avoid entire fairness?

Had special committee been clearly independent
Had special committee used separate advisors
Had conflicted directors haggled with special committee
"asked for 15%, then cut to 10%"

How much should be read into criticism of advisors?

Must a special committee always use a second set of financial and legal advisors?
$40 million contingent fee created a triable issue over DLJ's independence
◊ When will use of a contingent fee support an inference that an advisor isn't independent?
DLJ failed to opine on relative fairness of
the 10% premium to the low-vote shares
◊ Should an investment bank opine on relative fairness?
◊ How do you determine relative fairness?
◊ Is market trading data a reliable indicator?

How much was this decision colored by bad facts?

CEO's non-negotiable demand to get $130 million more from the 10% premium
"Suspiciously contingent" undisclosed $1 million payment to special committee members

Was decision overkill?

Payment of the 10% premium only reduced what low-vote shareholders got by 1.2%
Process resulted in completion of a large, complicated deal at a significant premium for all shareholders
Compare In re Toys "R" Us 877 A 2d 975, 1005
(Del Ch 2005)

Prior opinion dismissed claims against AT&T

Opinion (Del Ch 2003), Chancellor Chandler
Granted AT&T's summary judgment motion

Dismissed aiding and abetting claims against AT&T
Payment of 10% premium wasn't so egregious as to support inference that AT&T knowingly participated in any TCI director breach of fiduciary duty

Delaware Chancery Opinion Dec 2005

Opinion - Chancellor Chandler

Following indexes the opinion:

Facts I

Standard of review II

Analysis III

Duty of disclosure III.A

Value of equity-related benefits III.A.1
Compensation promised to the special committee III.A.2
Boards "careful consideration" of TCOMB premium III.A.3

Standard of review III.B

Entire fairness applies III.B.1
Burden rests on defendants III.B.2

Fair dealing III.C

Special committee did not have a clear mandate III.C.1
Choice of directors III.C.2
Choice of advisors III.C.3
Diligence of research and the fairness opinion III.C.4
Arms length bargaining III.C.5

Fair price III.D

Conclusion IV

Facts

Facts I

TCI had six tracking stocks

A and B stocks for each of three divisions
A had one vote per share; B had ten votes per share

AT&T acquired TCI in an arms-length stock merger -1999

CEO John Malone insisted on a 10% premium for his B shares
As a result B shares got a $376 million premium
at the expense of the A shares

CEO John Malone got $130 million of this premium
Several other directors had disparate holdings in B shares

Because of the size of the deal,
payment of the 10% premium only reduced
what low-vote shareholders got by 1.2%

Special committee was used to address director conflicts

Had two members

One had larger holdings in high-vote shares

Special committee was advised by same financial advisor and law firm as TCI

Proxy Statement Disclosures

Plaintiffs claimed that proxy statement disclosure
was inadequate in several respects III.A

Value of equity-related benefits for TCI officers and directors III.A.1

Disclosures incorporated by reference from 1998 annual meeting proxy were found sufficient
Even though they didn't detail option strike prices
Even though they didn't include a valuation of the options

Compensation promised to the special
committee III.A.2

Raises a triable issue of fact
Plan to "reasonably compensate" was approved at outset but not disclosed
Decision to pay each special committee member $1 million was made after process ended - "suspiciously contingent"

Boards "careful consideration" of TCOMB
premium III.A.3

Characterization as "careful" raises a triable issue of fact
Given substantive issues raised over the special committee's process

Court affirms that disclosure needn't be overly detailed

Needn't include details of deliberations
"Less disclosure can often be more appropriate than more"

SEC filings

AT&T Form S-4 1.08.99
TCI Deal Proxy Statement 1.08.99

Entire Fairness Applies

Court applies entire fairness standard III.B

Several TCI directors held significantly more B shares
than A shares
As holders of B shares got a $376 million premium
at the expense of the A shareholders
Premium to individual directors was substantial and material

Court cited:

In re FLS Holdings (Del Ch 1993)

Entire fairness applied to allocation of proceeds
of a cash merger
Challenge brought by holders of non-voting preferred

Levco v Readers Digest (Del 2002)

Holders of Class A non-voting common stock challenged disparate treatment in a recapitalization

Defendants bore burden of proving entire fairness III.B.2

While a special committee can be used to satisfy requirement, facts here "suggest that the Special Committee was not fully disinterested"

One special committee member had substantial B share holdings
Both received "suspiciously contingent compensation" -
$1 million payment determined after process ended

See Entire Fairness

Fair Dealing Issues

Record suggests process flaws III.C

Special committee:

Didn't have a clear mandate III.C.1

Unclear that special committee was to
represent interests of A shareholders
Special committee members' testimony conflicted on this

Choice of its members was suspect III.C.2

One of two members held primarily B shares
Another director who held A shares wasn't chosen

Advisors weren't independent III.C.3

Same legal and financial advisors that were already advising TCI were used by special committee
DLJ was to get a $40 million contingent payment

Didn't get complete information III.C.4

Historical trading prices of A shares v B shares
Precedent transactions involving high-vote stock premiums (most such deals involved no premium for high-vote shares)

Didn't engage in arms length bargaining III.C.5

Took 10% premium as a given

Fair Price Issues

10% premium for B shares was unfair III.D,
even though:

A shares got a 37% premium to their
pre-announcement price
A share price was within DLJ's fairness opinion
valuation ranges
Even though effect of B share premium
only lowered A share price by 1.2%

Special committee and its advisors failed to separately examine the fairness of the B share premium

Fairness Opinion Issues

DLJ was criticized for

Acting on behalf of both TCI and the Special Committee

"This alone raises questions regarding the quality and independence of the counsel and advice received."

Getting a large contingent fee

Put its independence into question
Contingent compensation of $40 million created "a serious issue of material fact as to whether DLJ (and DLJs legal counsel) could provide independent advice to the Special Committee."

Not opining separately on relative fairness

Whether the relative impact of a preference to one class was fair to the other class
"Notably, the DLJ opinion does not discuss the effect of the TCOMB premium upon the TCOMA holders, i.e., whether the TCOMB premium was fair to the TCOMA holders. Unfortunately for defendants, Levco appears to mandate exactly such an analysis: that the relative impact of a preference to one class be fair to the other class."

Fairness Opinions

Commentary

"Delaware Courts Criticism of Special Committee in TCI Merger Provides Important Guidance But May Not Be Entirely Fair", The M&A Lawyer by Alston & Bird,
Kevin Miller, February 2006

Law firms

Wachtell Lipton 12.30.05
Willkie Farr 1.09.06
Fried Frank 1.27.06
Potter Anderson Jan 2006
Torys 2.10.06

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