In Sciabacucchi v. Liberty Broadband et al., the Delaware Court of Chancery refused to apply the business judgment standard of review to an equity issuance completed in connection with two acquisitions (the “Acquisitions”) made by a Delaware corporation (“Charter Communications”). The plaintiff, a shareholder of Charter Communications, filed suit against the directors of Charter Communication for breach of fiduciary duty in connection with their issuance of equity to the largest stockholder, Liberty Share, of the company purportedly to help finance the Acquisitions (the “Issuance”). The Acquisitions and the Issuance were both approved by separate votes of the majority of shareholders unaffiliated with Liberty Share. Nevertheless, the plaintiff argued that the shareholder approval of the Issuance was coerced because the largest shareholder controlled the Board.

The Court disagreed and determined that Liberty Share did not control the Board. However, the Court did find that the unaffiliated shareholder approval of the Issuance was “structurally coercive” because the directors made completion of the lucrative Acquisitions contingent upon the shareholders’ approval of the inequitable Issuance. In other words, to receive the full benefit of the Acquisitions, the shareholders had to “swallow the pill” of the Issuance. As a result, the Court refused to apply the business judgment standard of review under the Corwin Presumption.

BOTTOM LINE: Delaware courts will not uphold a shareholder vote unless the shareholders were truly free to accept or reject a transaction without structural restraints.