Delaware’s takeover statute (Section 203 of the DGCL) has been on the books for more than a generation, but in recent years it hasn’t come up all that often in litigation. So, it’s news when the Chancery Court decides a case where the statute is front and center – even if it’s just a letter opinion. That happened last week when Chancellor McCormick issued a letter opinion denying motions to enjoin the stockholder vote on Madison Square Garden Entertainment’s (MSGE) proposed acquisition of MSG Networks on the basis of alleged violations of Section 203 of the DGCL.
Section 203 prohibits certain transactions between a Delaware corporation and an “interested stockholder,” which is defined generally to mean a beneficial owner of shares representing 15% or more of the company’s voting power. The statute prohibits business combinations with an interested stockholder for a period of three years, subject to certain exceptions. In the case of this deal, the relevant exception is the one that applies to a business combination with a person who became an interested stockholder in a transaction that received the prior approval of the board.
Both of the companies involved in this transaction are affiliated with James Dolan and his family. Rearranging the furniture at the companies that the Dolans control has been a bit of a cottage industry over the years, and two prior transactions involving those companies were relevant to the Court’s resolution of the allegations in this case. The first involved the spin-off of MSG Networks from Cablevision in 2010. As to that transaction, the Court held that the three-year prohibition on transactions with the Dolans ended in 2013.
In 2020, a third Dolan-controlled company, MSG Sports, spun off MSGE. At the time it approved the spin-off, the MSGE board approved the acquisition of MSGE common stock in the deal by members of the Dolan family group. However, due to its relationship with the Dolan family, the plaintiffs pointed out that under the statute, MSGE itself became an interested stockholder with respect to MSG Networks at the time of the spin-off. As a result, the plaintiffs alleged that it was subject to Section 203 and that none of the exceptions to the statute applied. This excerpt from her opinion explains why Chancellor McCormick rejected that argument:
Entertainment became an “interested stockholder” of Networks in 2019 solely by virtue of its relationship with the Dolan Family Group. The purpose of the statutory language by which Entertainment fits the definition of “interested stockholder” is to prohibit a holder of 15% or more of Networks’ stock from accomplishing indirectly what it is prohibited from accomplishing directly. In these limited circumstances, and where there are no allegations that the defendants are taking action to subvert the purpose of the statute, the restrictions imposed on Entertainment (the affiliate) must track those applicable to those of the Dolan Family Group (the Networks stockholder).
In her opinion, the Chancellor acknowledged that a lot more could be said about the “rich issues” presented in the case. However, she opted to issue a letter opinion due to the proximity of the stockholder vote and the upcoming holiday weekend. She promised to hold a hearing during which she’d explain the basis for her ruling in more detail. Hopefully, a transcript of that hearing will surface – and if you snag one, please send it my way.
– John Jenkins