COURT OF CHANCERY FIND PROVISIONS OF MERGER AGREEMENT AMBIGUOUS AND DENIES TELECOMMUNICATIONS GIANT’S MOTION TO DISMISS
By: Scott E. Waxman and Rachel Cheasty Sanders
In Charles F. Dolan v. Altice USA, Inc. et al., Case No. 2018-0651-JRS (Del. Ch. June 27, 2019), the Delaware Court of Chancery address Defendants’ 12(b)(6) motion to dismiss filed in response to the Plaintiff’s complaint containing the following six causes of action: (i) breach of contract, (ii) breach of implied covenant of good faith and fair dealing, (iii) equitable fraud, (iv) promissory estoppel, (v) negligent misrepresentation, and (vi) declaratory relief. Defendants include telecommunications and media companies Altice USA, Inc. and Altice Europe N.V. (collectively, “Altice”). Additionally, Plaintiffs named as nominal defendants Cablevision Systems Corporation (“Cablevision”) and News 12 Networks, LLC (“News12”). Plaintiffs include members of the Dolan family, the controlling shareholders of Cablevision and News12 prior to the sale of those companies to Altice. The Court denied Defendants’ motion to dismiss on the Dolan family’s claims for breach of contract, promissory estoppel, and declaratory relief and granted the motion pertaining to the claims for breach of implied covenant of good faith and fair dealing, equitable fraud, and negligent misrepresentation. (1)
In 2015, Altice and the Dolan family began discussion regarding Altice’s acquisition of Cablevision, one of the largest cable providers in the United States, which had been founded and run by the Dolan family. News12 is a group of “hyper-local, 24-hour” cable news television channels within Cablevision serving New Jersey, Connecticut, and New York. The Dolans attempted to retain News12, of which they were particularly fond, but eventually agreed to include it in the deal in exchange for a commitment from Altice that it would operate News12 “substantially in accordance with the existing News12 business plan” through the end of 2020. This covenant was included section 6.4(f) of the Merger Agreement, and the referenced business plan was attached as a schedule to the company disclosure letter. The plan provided that News12 would employ 462 full time employees from 2016 through 2020 and not materially modify its content or decrease any of its budgeted expenses. However, following the transaction, Altice fired approximately 70 employees, thus decreasing News12’s operating expenses by $7 million, and implemented a plan to terminate 10% of News12’s employees each year.
To meet the simple notice pleading standard followed in Delaware and overcome a 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted, the allegations in the complaint must “provide the defendant with sufficient notice of the basis for the plaintiff’s claim.” The court accepts all well-pleaded factual allegations in the complaint as true and draws all reasonable inferences in the favor of the non-moving party. The court cannot choose one reasonable interpretation over another. A motion to dismiss will be granted only if “the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances” and “the defendants’ interpretation is the only reasonable construction as a matter of law.”
Altice claimed that Plaintiffs have no standing to enforce the Merger Agreement, as it was entered into among Cablevision, Altice, and a merger subsidiary. Because the Dolan shareholders were not parties to the Merger Agreement themselves, they need to show that they have standing as third-party beneficiaries to the Merger Agreement. To make this showing, the Plaintiffs must plead facts that allow the Court to reasonably infer that “(i) the contracting parties intended that the third-party beneficiary benefit from the contract, (ii) the benefit was intended as a gift or in satisfaction of a pre-existing obligation to that person, and (iii) the intent to benefit the third party was a material part of the parties’ purpose on entering into the contact.” The Dolans maintained that they would have withheld News12 from the transaction if Defendants had not agreed to operate it pursuant to section 6.4(f), thus alleging that the contracting parties intended that the third parties benefit from the contract. The Dolans further cited that they agreed to include News12 in the deal only because of Altice’s promise to operate it according to the business plan and that they agreed to vote their shares in favor of the Merger Agreement in reliance upon this promise, thus alleging the benefit was in satisfaction of a pre-existing obligation. Lastly, the Dolans pleaded that section 6.4(f) was included to “induce the Dolan family to sell their Cablevision stock, merge Cablevision and News12 into Altice” and vote their shares in favor of the merger, which the Court found “reasonably conceivable that the intent to benefit the third party was a material part of the parties’ purpose in entering into the contract.” The Court held that the Dolan family “well pled” each of the elements to establish third-party beneficiary status, but advised that extrinsic evidence would be necessary to “determine what Section 6.4(f) was intended to mean and how, if at all, it is to be enforced” due to an additional provision in the Merger Agreement that specifically disclaimed any third-party beneficiaries.
Additionally, Defendants asserted that the survival provision in the Merger Agreement failed to designate section 6.4(f) as one surviving the Closing, resulting in section 6.4(f) having no further force or effect following the Closing of the merger. Moreover, Altice represented the provision as a “goodwill gesture” meant in no way to bind Altice in any way. Plaintiffs described the provision as “clearly surviving Closing” because it was a “detailed, heavily negotiated provision with an accompanying schedule and five-year life span.” Further, the Dolan family pointed out that section 6.4(f) was not drafted as an expression of goodwill, but rather an obligation as it stated that Altice “will operate News12 in accordance with the existing News12 business plan.” The Court noted that, in considering the motion to dismiss, Altice’s interpretation of sections 6.4(f) and the survival provision must be the only reasonable construction of the provisions as a matter of law. However, the Court explained that, to follow Altice’s construction of the provisions would be to render Section 6.4(f) as “superfluous in the sense that it is entirely unenforceable–by anyone” and that the result would not align with the canon opposing contract construction that results in “mere surplusage.” Thus, the Court found that the Merger Agreement was ambiguous with respect to section 6.4(f)’s interaction with other provisions governing third-party beneficiaries and survival after Closing, and denied Defendants’ motion to dismiss the breach of contract.
Further, the Court found that the Dolan family stated a claim for promissory estoppel. Pursuant to the “Lord test”, promissory estoppel requires a showing, by clear and convincing evidence, that “(1) a promise was made; (2) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promise; (3) the promisee reasonably relied on the promise and took action to his detriment; and (4) such promise is binding because injustice can be avoided only by enforcement of the promise.” As an alternative to breach of contract, the Court found that the Dolans adequately pled that (1) Altice made a promise to run News12 pursuant to its business plan; (2) Altice intended to induce the Dolans’ action to sell News12 and support the Merger Agreement; (3) the Dolan family reasonably and detrimentally relied on the promise and sold News12 and supported the Merger Agreement; and (4) injustice would result by the abandonment of the News12 business plan.
The Court granted Defendants’ motion to dismiss the claim for breach of the implied covenant of good faith and fair dealing as duplicative of the breach of contract claim. Moreover, the Court dismissed the equitable fraud and negligent misrepresentation claims because they failed “as a matter of law because, in the context of a commercial arm’s-length transaction, there is no “special relationship” between Altice and the Dolan family as required by Delaware law.”
(1) Although not discussed in this summary, long time news anchors of News12, Colleen McVey and Danielle Campbell, were additional plaintiffs to the Dolan Family’s complaint. The anchors were to be terminated in connection with Altice’s plan to downsize News12. However, the Court dismissed all claims of McVey and Campell on the basis that the news anchors lacked standing to sue.