Print
E-MailNate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post is based on his WSGR memorandum. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
Several decisions in 2019 addressed special litigation committees (“SLCs”), including one out of the U.S. District Court for the District of Maryland. [1] In that federal case, Judge Catherine Blake considered technical and policy issues around the designation of such a committee by the board of directors of Sinclair Broadcast Group, Inc. (“Sinclair Broadcast”) in connection with potential claims related to a failed merger between Sinclair Broadcast and Tribune Media Company (“Tribune Media”). On the disputed preliminary record regarding formation of the committee, Judge Blake declined to dismiss the complaint or stay the litigation pending that committee’s investigation.
Background of the Sinclair Broadcast SLC
Sinclair Broadcast is a publicly traded telecommunications company that was founded by Julian Sinclair Smith. The Smith family controls half of the Sinclair Broadcast board and approximately 75% of the stockholder voting power. In May 2017, Sinclair Broadcast and Tribune Media entered into a merger agreement, which required Sinclair Broadcast to divest certain assets to obtain Federal Communications Commission (“FCC”) approval. Sinclair Broadcast proposed divestitures to affiliates of the Smith family. But those proposals were not consummated, and the FCC came to believe that Sinclair Broadcast had made material misrepresentations in its related disclosure statements. In August 2018, Sinclair Broadcast pulled out of the merger.
Promptly after termination of the merger agreement, Tribune Media commenced a separate action against Sinclair Broadcast in the Delaware Court of Chancery, alleging breach of contract and seeking $1 billion in damages. [2] A few months later, Sinclair Broadcast stockholders filed the Sinclair Broadcast complaints in Maryland federal court alleging that the directors and the president-CEO of Sinclair Broadcast breached their fiduciary duties in connection with the failed merger. The defendants in the Maryland federal action moved to dismiss on the grounds that an SLC had been formed before the complaints were filed. The plaintiffs disputed the defendants’ characterization of the timing and terms of the SLC’s formation. The defendants also moved in the alternative to stay litigation pending resolution of the SLC’s investigation.
Sinclair Broadcast Opinion
In support of their contention that the SLC had been formed before the complaints were filed, the defendants cited board resolutions forming the SLC and Sinclair Broadcast’s public filings disclosing that a committee consisting of independent directors had been formed in response to earlier stockholder demand letters. The court noted that an SLC under Maryland law—unlike the Sinclair Broadcast committee—has authority to render a corporate decision (rather than a mere recommendation). The court also declined to take judicial notice of the formation of the SLC, because the public filing was ambiguous and different versions of the board resolutions left unclear who composed that committee and what authority had been delegated to the committee.
In addition, the Sinclair Broadcast board’s resolutions were viewed as potentially conditioning the committee’s authority on finalization of the committee membership. Thus, the resignations by two of the four original committee members, attributed to their previous relationships with the controlling Smith family, further undermined the defendants’ assertion that an independent and fully empowered SLC had been in place when the complaints were filed. The uncertainty surrounding the membership and scope of authority led the court to deny the motion to dismiss.
Next, the court addressed the defendants’ request for a stay of litigation pending the SLC’s investigation and determinations. Although the court noted that such a stay is typical, it denied the stay in this case for two reasons that it determined would detract from the SLC’s ability to “command respect” for its decisions. First, the court found that concerns arising from the shifting of the committee’s membership and original inclusion of directors with close ties to the controlling family were not allayed by the defendants’ failure to produce a single final form of board delegation resolutions. Second, the court found that the original delegation, conditioning authority on finalization of committee membership, may have been inadequate to constitute an SLC. The court found that the disputes around these key issues “do not instill confidence” and precluded a stay of litigation.
Takeaways
Special litigation committees have long been recognized as both a powerful option for boards confronting litigation, and subject to exacting judicial review. [3] Sinclair Broadcast is consistent with those principles and provides guidance regarding such committees.
- Following closely on the heels of Delaware Court of Chancery decisions regarding other SLCs, this case sends a signal (consistent with practice in Delaware) that the Sinclair Broadcast SLC is part of an increasing use of these committees, which may extend outside Delaware. Directors and counsel who are involved in this growing practice may use Judge Blake’s decision to anticipate the scrutiny that potentially applies in litigation related to an SLC and key practical issues such as the importance of clear resolutions designating an SLC.
- Unclear board resolutions intending to designate an SLC may be viewed as undermining the SLC process. In Sinclair Broadcast, where the SLC was expected to have the power to render corporate decisions and the general ability to “command respect,” the lack of clarity in identifying the committee members and scope of the committee’s power were dispositive of the pleading stage motions. In addition, this opinion’s focus on technical precision in a committee designation may also come into play in other contexts, such as when seeking to empower a committee for purposes of MFW under Delaware law. [4]
- Judge Blake noted that she did not need to resolve whether the plaintiffs were required to plead demand futility with respect to the SLC or the entire board. This issue could be important in another case where it is more directly in front of the court, and Judge Blake appeared to treat it as an open question.
Endnotes
1Fire and Police Ret. Health Care Fund, San Antonio v. Smith, Civil Nos. CC-B-18-3670, 3952 (D. Md. Dec. 9, 2019) (“Sinclair Broadcast”); see also In re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. Dec. 4, 2019); Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019); In re Insys Therapeutics Inc. Deriv. Litig., C.A. 12696-JTL (Del. Ch. Mar. 26, 2019) (TRANSCRIPT).(go back)
2See Tribune Media Co. v. Sinclair Broadcasting Group, C.A. No. 2018-0593-JTL (Del. Ch. August 9, 2018).(go back)
3See, e.g., In re Oracle Corp. Deriv. Litig., 824 A.2d 917 (Del. Ch. 2003). Indeed, the Delaware Supreme Court has described the standard of independence for special litigation committee members as “like Caesar’s wife—above reproach.” Beam ex rel. Martha Steward Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. 2004).(go back)
4Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (holding that review of a conflicted transaction with the company’s controlling stockholder may be returned to business judgment when, among other things, an independent director committee is empowered ab initio).(go back)
