Shenk Matter 1

Case 1:11-cv-02943-JSR Document 53
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UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK ROBERT MICHAEL SHENK, Derivatively on Behalf of SIRIUS XM RADIO INC., Plaintiff, v. MELVIN ALAN KARMAZIN, GARY PARSONS, JOAN L. AMBLE, LEON D. BLACK, EDDY W. HARTENSTEIN, JAMES P. HOLDEN, JAMES F. MOONEY, JACK SHAW, GREGORY B. MAFFEI, JOHN C. MALONE, DAVID J.A. FLOWERS, CARL E. VOGEL, and VANESSA A. WITTMAN, Defendants, -andSIRIUS XM RADIO INC., Nominal Defendant. : : : : Case No. 1:11-cv-02943-JSR : : : : : : : : : : : : : : : : :
PLAINTIFFS CORRECTED MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS MOTION FOR SUMMARY JUDGMENT
SPECTOR ROSEMAN KODROFF & WILLIS, P.C. 1818 Market Street, Suite 2500 Philadelphia, PA 19103 Telephone: (215) 496-0300 Facsimile: (215) 496-6611
KAHN SWICK & FOTI, LLC 206 Covington Street Madisonville, LA 70447 Telephone: (504) 455-1400 Facsimile: (504) 455-1498
Attorneys for Plaintiff Robert Michael Shenk
TABLE OF CONTENTS
PRELIMINARY STATEMENT ................................................................................................. 1 STATEMENT OF DISPUTED FACTS...................................................................................... 3 ARGUMENT................................................................................................................................. 7 I. STANDARDS FOR SUMMARY JUDGMENT ............................................................ 7
II. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS PRE-MERGER STATEMENTS TO SHAREHOLDERS CONCERNING PRICES............................ 7 A. Violations of Section 10(b) of the Securities Exchange Act..................................... 7 1. Material Misstatements .............................................................................................. 8 2. Scienter....................................................................................................................... 12 3. Loss Causation and Injury....................................................................................... 15 a. b. c. B. $193 Million in Antitrust Liability .................................................................... 15 $42 Million in Financial Distress ....................................................................... 16 Additional Costs to Obtain Merger Approval.................................................. 19
Breach of the Delaware Duty of Full Disclosure to Shareholders ........................ 19
III. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS POST-MERGER PRICE INCREASES........... 23 A. B. The Business Judgment Rule and its Limitations.................................................. 23 The Business Judgment Rule does not Immunize Defendants Conduct ............ 23 1. Defendants Lies to the FCC in Order to Secure Approval for the ..................... 24 2. Causal Link Between Defendants Lies to the FCC and Subsequent Price Increases..................................................................................................................... 25
C.
Defendants Conduct Arising from Their Misrepresentations to the FCC and Improperly Raising Prices Resulted in the Blessing Antitrust Matter and Injury to Sirius................................................ 28
IV. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS BIAS IN FAVOR OF THE MALONE TRANSACTION. .......................................... 31 A. Evidence that Defendants Breached their Fiduciary Duties under Revlon by Rejecting Ergen I ...................................................................................................... 31 1. Ergen I Offer with 51% Equity Stake vs. Malone Offer....................................... 32 2. Defendants Fear of the Ergen I Deal and Bias Toward the Malone Offer is Exposed ...................................................................................................................... 34 3. Defendants Red Herring: Net Operating Loss Tax Savings............................... 36 B. Evidence that Defendants Breached their Fiduciary Duties under the Business Judgment Rule by Rejecting Ergen II and III ................................. 36 The Company Suffered Damages Arising from the Malone Transaction ........... 38 SUMMARY JUDGMENT MUST BE DENIED WITH RESPECT TO PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS $35 MILLION OPTION GRANT TO KARMAZIN............................................................................. 38
C. V.
CONCLUSION ........................................................................................................................... 40
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TABLE OF AUTHORITIES Page(s) CASES Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970)...............................................................................................................7, 8 Am. Hotel Intl Grp., Inc. v. OneBeacon Ins. Co., 611 F. Supp. 2d 373 (S.D.N.Y. 2009), affd, 374 F. Appx 71 (2d Cir. 2010)..........................8 Anderson v. AT & T Corp., 07 Civ. 5913 (MGC), 2010 WL 1780953 (S.D.N.Y. May 4, 2010)........................................12 Arnold v. Socy for Sav. Bancorp, 650 A.2d 1270 (Del. 1994) ......................................................................................................22 Auburn Chevrolet-Oldsmobile-Cadillac, Inc. v. Branch, No. 5:06-CV-0362, 2009 WL 667430 (N.D.N.Y. Mar. 10, 2009) ..........................................23 In re Bank of Am. Corp. Sec., Deriv., & Emp. Ret. Income Sec. Act (ERISA) Litig.,757 F. Supp. 2d 260 (S.D.N.Y. 2010), recon. denied, No. 09-MD-2058 (PKC), 757 F. Supp. 2d 260 (S.D.N.Y. 2010) ...................................8, 11, 12, 15 Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989) ......................................................................................................32 Basic Inc. v. Levinson, 485 U.S. 224 (1988)...................................................................................................................8 Bershad v. CurtissWright Corp., 535 A.2d 840 (Del. 1987) ........................................................................................................20 Blessing v. Sirius XM Radio Inc., Civ. No. 1:09-cv-10035-HB (S.D.N.Y.).......................................................................... passim Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002).....................................................................................................11 Caruso v. Metex Corp., No. CV 89-0571, 1992 WL 237299 (E.D.N.Y. July 30, 1992) ...............................................20 Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) ........................................................................................................30 In re Chicago Flood Litig., No. 93 C 1214, 1995 WL 437501 (N.D. Ill. July 21, 1995) ....................................................10
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In re Citigroup Inc. Sholder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009)..................................................................................................39 In re Columbia Secs. Litig., 155 F.R.D. 466 (S.D.N.Y. 1994) .............................................................................................12 In re Credit Suisse First Boston Corp. Sec. Litig., No. 97 Civ. 4760 (JGK), 1998 WL 734365 (S.D.N.Y. Oct. 20, 1998) ...................................11 Di Tomasso v. Loverro, 293 N.Y.S. 912 (N.Y. App. Div. 1937), affd mem., 276 N.Y. 551 (N.Y. 1937)....................29 Ebewo v. Martinez, 309 F. Supp. 2d 600 (S.D.N.Y. 2004)......................................................................................18 Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987)................................................................................................20 Envtl. Conserv. Org. v. Bagwell, No. 4:03-CV-807-Y, 2005 WL 2415957 (N.D. Tex. Sept. 28, 2005) .....................................10 Exxon Co., U.S.A. v. Sofec, Inc., 517 U.S. 830 (1996).................................................................................................................16 Fleming v. Verizon New York, Inc., No. 03 Civ. 5639 (WHP), 2006 WL 2709766 (S.D.N.Y. Sept. 22, 2006) ..............................18 Frank v. Arnelle, No. CIV. A. 15642, 1998 WL 668649 (Del. Ch. Sept. 16, 1998) .....................................20, 22 Frankel v. Slotkin, 984 F.2d 1328 (2d Cir. 1993).....................................................................................................8 Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985)...................................................................................................11 Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003)..................................................................................................29 Haber v. ASN 50th Street, LLC, 272 F.R.D. 377 (S.D.N.Y. 2011) .............................................................................................17 J.I. Case Co. v. Borak, 377 U.S. 426 (1964).................................................................................................................15 Jeffreys v. City of N.Y., 426 F.3d 549 (2d Cir. 2005).......................................................................................................7
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In re Joint E. & S. Dist. Asbestos Litig., 52 F.3d 1124 (2d Cir. 1995).....................................................................................................17 In re Kidder Peabody Sec. Litig., 10 F. Supp. 2d 398 (S.D.N.Y. 1998)........................................................................................12 Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005).....................................................................................................16 Longview Equity Fund, L.P. v. iWorld Projects & Sys., Inc., No. 05 Civ. 6745 (RJS), 2008 WL 833230 (S.D.N.Y. Mar. 26, 2008) .....................................7 Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) ................................................................................................20, 22 McClellan v. Smith, 439 F.3d 137 (2d Cir. 2006).......................................................................................................7 Mendell v. Greenberg, 927 F.2d 667, amended, 938 F.2d 1528 (2d Cir. 1990).............................................................8 Metro Commcn Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121 (Del. Ch. 2004)............................................................................................28, 30 Miller v. American Tel. & Tel. Co., 507 F.2d 759 (3d Cir. 1974)...............................................................................................28, 29 Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989) ......................................................................................................32 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)...............................................................................................11, 12 Ocean Partners, LLC v. N. River Ins. Co., 546 F. Supp. 2d 101 (S.D.N.Y. 2008)........................................................................................8 In re Pfizer Inc. Sec. Litig., 584 F. Supp. 2d 621 (S.D.N.Y. 2008)......................................................................................13 Playboy Enters., Inc. v. Dumas, 960 F. Supp. 710 (S.D.N.Y. 1997).............................................................................................8 Press v. Chem. Inv. Servs. Corp., 166 F.3d 529 (2d Cir.1999)......................................................................................................12 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) ......................................................................................31, 32, 35, 38
RMED Intl, Inc. v. Sloans Supermarkets, Inc., 185 F. Supp. 2d 389 (S.D.N.Y. 2002)..................................................................................9, 13 Rogers v. American Can Co., 187 F. Supp. 532 (D.N.J. 1960), affd, 305 F.2d 297 (2d Cir. 1962).......................................29 Samaritan Health Ctr. v. Simplicity Health Care Plan, 459 F. Supp. 2d 786 (E.D. Wis. 2006).....................................................................................10 San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996).......................................................................................................11 In re Santa Fe Pac. Corp. Sholder Litig., 669 A.2d 59 (Del. 1995) ..........................................................................................................20 Sec. Ins. Co. of Hartford v. Old Dominion Freight Line, Inc., 391 F.3d 77 (2d Cir. 2004).........................................................................................................7 Shenk v. Karmazin, No. 11 CIV. 2943 (JSR), 2011 WL 5148667 (S.D.N.Y. Oct. 28, 2011) ......................... passim Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) ........................................................................................................20 Stroud v. Grace, 606 A.2d 75 (Del. 1992) ..........................................................................................................20 In re Syncor Intern. Corp. Shareholders Litig., 857 A.2d 994 (Del. Ch. 2004)..................................................................................................30 In re Toys R Us, Inc. Sholder Litig., 877 A.2d 975 (Del. Ch. 2005)..................................................................................................35 In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008)..................................................................................................21 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)...............................................................................................................8, 9 Turner v. Bernstein, No. 16190, 1999 WL 66432 (Del. Ch. Feb. 9, 1999) ..............................................................20 U.S. v. All Right, Title & Interest in Real Prop. & Appurtenances, 77 F.3d 648 (2d Cir. 1996).......................................................................................................17 United Paperworkers Intl Union v. Intl Paper Co., 985 F.2d 1190 (2d Cir. 1993)...................................................................................................11
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Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) ........................................................................................................32 Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).................................................................................................................8 In re Walt Disney Co. Deriv. Litig., 825 A.2d 275 (Del. Ch. 2003)..................................................................................................40 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693 (Del. Ch. 2005)................................................................................23, 27, 28, 38 In re Walt Disney Co., No. Civ. A. 15452, 2004 WL 2050138 (Del. Ch. Sept. 10, 2004) ....................................39, 40 Wilshire Oil Co. of Tex. v. Riffe, 409 F.2d 1277 (10th Cir. 1969) ...............................................................................................29 Wilson v. Great Am. Inds., Inc., 855 F.2d 987 (2d Cir. 1988).....................................................................................................11 In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 638268 (S.D.N.Y. Mar. 21, 2005)....................................7 Wortley v. Camplin, 333 F.3d 284 (1st Cir. 2003)....................................................................................................16 STATUTES Section 10(b), 15 U.S.C. 78j(b) .............................................................................................. 7-19 8 Del. C. 102(b)(7).......................................................................................................... 20, 21-22 OTHER AUTHORITIES Fed. R. Civ. P. 7(b)(1)(B) ..............................................................................................................39 Fed. R. Civ. P. 37(c)(1)..................................................................................................................17 Fed. R. Civ. P. 56(c) ......................................................................................................................17 Fed. R. Evid. 801(d)(2)(B).............................................................................................................10 Rule 10b5 .....................................................................................................................................15 Rule 26(a).................................................................................................................................17, 18 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corp. & Business Org. 4.19, at 4-335 (Supp. 1992) .....................................................................................................22
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PRELIMINARY STATEMENT 1 Defendants desperately want to make this case about the Board simply exercising its business judgment to raise prices and opting for a better financing deal in the face of the collapsing U.S. economy in 2008. In the end, however, the documents and testimony tell a far different storyone involving lies to federal regulators and Siriuss shareholders concerning lower prices after the Sirius-XM merger, actual price increases in violation of express promises to regulators, and the favoring of an inferior financing deal motivated by Defendants desire to entrench themselves on the Board. Summary judgment must be denied unless the facts, in material part, are not subject to genuine dispute. Here, material facts are heavily disputed. As the record demonstrates, there is substantial evidence from which a reasonable jury could find Plaintiffs factual claims to be true. The story told by this record stars Mel Karmazin, the CEO of Sirius, who was singularly focused on acquiring XM, Siriuss only competitor, despite the enormous $3 billion debt burden the combined Company would inherit. Because of this massive debt, however, Defendants knew that they would somehow have to raise prices and fees after the merger and, even then, would be forced to turn to the high-risk debt market by February 2009 or face bankruptcy. Sirius would have to clear the first hurdle and gain approval for the merger to monopoly by federal regulators, including the Federal Communications Commission (FCC) and the Department of Justice (DOJ) and from its shareholders. To do this, Defendants resorted to their only option to gain approval from these agencies and shareholders alikedeceiving them into believing that Sirius XM would not only maintain its prices, but that the merger would
1
As referred to herein, D Ex. refers to Defendants numbered exhibits as attached to the affidavit of Mary E. McGarry. P Ex. refers to Plaintiffs numbered exhibits as attached to the affidavit of Melinda A. Nicholson. P 56.1 refers to Plaintiffs Rule 56.1 Statement. D 56.1 refers to Defendants Rule 56.1 Statement.
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actually lead to lower prices for consumers. Such misstatements were repeated over and over again to shareholders, the FCC, the press, and to Congress. These statements were manifestly untrueboth as to a combined companys ability to lower prices and as to Defendants actual intentions. Prior to the merger, Defendants had specifically approved plans to increase prices on many of Siriuss core services; and, almost as quickly as the merger was consummated, Sirius Board approved price hikes and imposed new fees on subscribers. These price hikes were considerable and, as Defendants likely anticipated, quickly led to a civil antitrust class action that Sirius was forced to settle after this Court (Baer, J.) denied summary judgment in favor of the plaintiffs and granted class certification. Thus, no matter how far Defendants try to stretch the protections they claim they are owed under the business judgment rule, their bald-faced misrepresentations to the FCC and the Companys own shareholders, from which the antitrust liability and many other injuries arose, far exceed the breaking point of the rule. Likewise, there is substantial evidence from which a reasonable jury could conclude that Defendants breached their fiduciary duties when they selected the single financing offer made by John Malone despite better terms offered to the Company by Charles Ergen on, not one or two, but three occasions in early 2009. In fact, from the evidence presented, a jury could conclude that Defendants tilted the playing field in Malones favor, never giving Ergens multiple superior offers a fair hearing. Rather, the Board allowed Karmazins personal animosity with Ergen and a desire to retain their positions interfere with their judgment. Defendants course of misconduct reached its climactic conclusion when, in June 2009, the Board after a perfunctory review process, lavished on Karmazin a $7 million bonus and stock options worth over $35 million.
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STATEMENT OF DISPUTED FACTS From the moment he joined Sirius as CEO, Mel Karmazin was singularly focused on combining it with competitor XM, despite knowing that such a merger (the Merger) could jeopardize the combined companys existence because of the massive debt that ensued, which would exceed $3 billion for two companies that had experienced losses every year since inception. P 56.1 171. This, in fact, occurred, and the company has suffered tens of millions of dollars in damages in the form of financial distress arising from the debt load. P 56.1 235. Because of such debt, Defendants knew that the combined company (Sirius XM) would have to increase prices following the Merger. P 56.1 172, 187. Karmazin and the Sirius Board of Directors had long discussed, and had approved plans for, substantial increases on the prices of Siriuss core services such as basic subscriptions and multi-receiver subscriptions. P 56.1 186. By no later than the summer of 2006, and continuing into 2007, Karmazin and the Boards desire to raise prices had transformed into the development of concrete plans to do so. P 56.1 186(b). At the Boards request, a 2007 budget was prepared which would include at least $70 million in additional revenue, premised upon increases in the prices of core services such as basic and multi-receiver subscriptions. P 56.1 186(d)(f). Defendants have submitted an expert report in this litigation in which they admit that Sirius had pre-merger plans to raise prices on basic, multi-receiver, and Internet streaming subscriptions. P 56.1 186(g). Nonetheless, after the Merger was announced, Defendants madeand caused Sirius to makebroad, affirmative, and unqualified representations to shareholders, regulators, Congress, and the public that the Merger would result in lower or stable prices. P 56.1 173-182. These statements included direct communications to shareholders and other widely-publicized
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statements that were available to shareholders, including a Joint Merger Proxy Statement, and were repeated until the eve of the shareholder vote on the Merger in early November 2007. P 56.1 173(a), (c), (h), (j), (l), (n), (p), (r), (u), 182. The statements also included express promises to Siriuss primary regulator, the Federal Communications Commission (FCC), that the monthly price of a basic subscription ($12.95) and the monthly price of a multi-receiver subscription ($6.99) would not rise. P 56.1 173(e). Such promises were included in a Joint Application to the FCC which was disseminated to shareholders. P 56.1 173(f), (t). 2 In none of these statements did Sirius ever state that the promised lower prices referred only to new subscription packages that the combined company might offer, such as partial-channel packages. P 56.1 173(b), (d), (g), (i), (k), (m), (o), (q), (s), (v), 178. Defendants plans to raise prices on basic, multi-receiver, and Internet streaming subscriptions were put on hold after the Merger was announced. P 56.1 188. The decision to put the price increases on hold was made, in part, out of concern that the increases would jeopardize approval of the Merger by the FCC or the U.S. Department of Justice (DOJ). P 56.1 189. The plans to increase prices were not abandoned altogether, but were simply held in abeyance until after the Merger was approved. P 56.1 190-198. Indeed, practically as soon as the Merger was consummated in late July 2008, Defendants caused Sirius to increase the price of multi-receiver subscriptions to $8.99 monthly, to increase the size of the Music Royalty PassThrough fee (MRF), and to impose a new Internet streaming charge of $2.99 per month. P 56.1 191. By October 26, 2008, Sirius executives, with Karmazins approval, had determined
2
While in one filing with the FCC, Sirius went into detail concerning several new, partialchannel subscriptions that would feature lower prices, P 56.1 175, 181, this filing was not disseminated to shareholders, P 56.1 176, and in any event repeated promises concerning lower prices. P 56.1 177. Moreover, this filing affirmed that the $12.95 basic price and $6.99 multi-receiver price would not rise, P 56.1 179-180, and it downplayed the likelihood of any increases with respect to even new services. P 56.1 181. 4
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to renew Siriuss pre-Merger plans to increase the price of a basic subscription from $12.95 to approximately $14.95. P 56.1 192-193. This increase was implemented in January 2012. P 56.1 194. The Board of Directors also reviewed and approved a 2009 Operating Plan based on increases in multi-receiver subscriptions (to $8.99 per month), Internet streaming, and the MRF. P 56.1 195-196. These increases, too, were implemented. P 56.1 197. Defendants postMerger pricing decisions, and its financial results involving them, have been the subject of renewed investigation or inquiry by federal regulators, including both the FCC and the Securities and Commission. P 56.1 198. Defendants decisions to conceal their intentions of raising prices substantially prolonged the Merger approval process, injuring Sirius. P 56.1 199-201. Moreover, Defendants post-Merger pricing decisions gave rise to antitrust liability and injured Sirius in the amount of $196 million, equal to the value of the settlement to which Sirius agreed in the Blessing antitrust matter to obtain a release from liability, plus attorneys fees and prejudgment interest. P 56.1 236. 3 By early 2009, several players were interested in providing relief financing to Sirius XM. Chief among them were Charles Ergen of Dish Network/Echostar and John Malone of Liberty Media Corporation. The Board entertained offers from two parties in February and March of
Defendants lies to shareholders and regulators concerning post-Merger prices represented merely the continuation of a longstanding policy to try to evade the restrictions imposed on Sirius by its regulators. Indeed, to secure FCC approval of the Merger, Sirius was required to agree to a $2.2 million penalty for the unauthorized placement of terrestrial repeaters (devices to retransmit its signals through densely populated urban areas). P 56.1 47. The FCC was emphatic in describing the brazen nature of the violations. D Ex. 43, 169; D Ex. 41 at 1, 20-22. Moreover, Sirius had a long history of disregarding a 1997 FCC Order requiring it to certify that its final receiver design would allow Sirius radios to be interoperable with (i.e., receive and process the signals of) XM radiosand to make such interoperable radios commercially available. P 56.1 202-206. Karmazin and the Board were well aware of these issues. P 56.1 205. The FCC analyzed the record and concluded that, contrary to Siriuss arguments that it only had to design an interoperable radio, the 1997 FCC Order did, in fact, require Sirius to make such a radio commercially available. P 56.1 206. 5
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2009. However, the playing field was tilted in favor of Malone despite more favorable terms offered by Ergen. Ergen made three separate offers that would have benefitted Sirius XM more than the Malone offer, but each of Ergens offers was spurned in favor of the Malone Offer. P 56.1 207-230. Plaintiffs estimate damages to Sirius XM arising from the choice of the Malone offer at approximately $22.5 million. P 56.1 237. In mid-2009, after Karmazin in his single-minded pursuit of the Merger had nearly bankrupted Sirius XM, the Board approved a renewal of Karmazins employment contract on lavish terms. P 56.1 231-234. The Board not only awarded Karmazin a $7 million bonus for 2009, approximately six times his base salary, it also awarded him 120,000,000 million stock options at an exercise price of $0.43 per share. P 56.1 231. The fair value of these options on the date of the grant was $35,209,400, as reported by Sirius itself. P 56.1 231. This brought Karmazins total compensation for 2009 to $43,466,790. P 56.1 232. In determining to grant Karmazin options worth over $35 million to stay with the Company for three more years, the Board itself conducted no negotiations with Karmazin. The full Board attempted to insulate itself from responsibility for Karmazins renewed employment contract by assigning the task of negotiating with Karmazin to the Compensation Committee. The Compensation Committee itself did not retain an independent compensation consultant to advise them in the negotiation of Karmazins compensation arrangements or to assess the reasonableness of those arrangements. The actual negotiations between the Compensation Committee and Karmazin involved the participation of only a single other director. P 56.1 232. Malone, a controlling shareholder and Board member, enthusiastically supported the renewal of Karmazins contract and the grant of tens of millions of dollars in options. Malone had known Karmazin for over many years and had interacted with him on dozens of occasions in social and professional settings alike. P 56.1
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233. Plaintiffs expert estimates that Sirius was injured by the Karmazin option grant in the amount of $40 million. P 56.1 237. ARGUMENT I. STANDARDS FOR SUMMARY JUDGMENT To defeat a motion for summary judgment, all that is required [from a non-moving party] is that sufficient evidence supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties differing versions of the truth at trial. McClellan v. Smith, 439 F.3d 137, 144 (2d Cir. 2006) (citation and internal quotation marks omitted). The Court must construe the evidence in the light most favorable to the non-moving party, drawing all inferences in that partys favor. Jeffreys v. City of N.Y., 426 F.3d 549, 553 (2d Cir. 2005); Sec. Ins. Co. of Hartford v. Old Dominion Freight Line, Inc., 391 F.3d 77, 83 (2d Cir. 2004) (the court is required to resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought); Longview Equity Fund, L.P. v. iWorld Projects & Sys., Inc., No. 05 Civ. 6745 (RJS), 2008 WL 833230, at *7 (S.D.N.Y. Mar. 26, 2008) (credibility assessments, choices between conflicting versions of the events, and the weighing of evidence are matters for the jury, not for the court on a motion for summary judgment). 4 II. GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS PRE-MERGER STATEMENTS TO SHAREHOLDERS CONCERNING PRICES A. Violations of Section 10(b) of the Securities Exchange Act
Moreover, where the evidentiary matter in support of the motion does not establish the absence of a genuine issue, summary judgment must be denied even if no opposing evidentiary matter is presented. Adickes v. S.H. Kress & Co., 398 U.S. 144, 160 (1970) (citation omitted); see also, In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2005 WL 638268, at *3 (S.D.N.Y. Mar. 21, 2005) (same). 7
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To support a derivative claim with respect to a corporate transaction for which shareholder approval was sought under Section 10(b), 15 U.S.C. 78j(b), plaintiff must prove the defendants made material misstatements of fact, with scienter, and that the corporation was harmed thereby. Frankel v. Slotkin, 984 F.2d 1328, 1332 (2d Cir. 1993) (Section 10(b) derivative claims); accord In re Bank of Am. Corp. Sec., Deriv., & Emp. Ret. Income Sec. Act (ERISA) Litig., 757 F. Supp. 2d 260, 320 (S.D.N.Y. 2010), recon. denied, No. 09-MD-2058 (PKC), 2010 WL 4237304 (S.D.N.Y. Oct. 8, 2010). Here, Defendants have failed to foreclose the possibility that Plaintiff would be able to establish the existence of each of these elements at trial. Cf. Adickes, 398 U.S. at 157. Summary judgment must be denied. 5 1. Material Misstatements
A misrepresentation or omission is material within the meaning of Section 10(b) if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). With regard to misrepresentations contained within proxy statements or related materials, [o]nly when the proxy statement fully and fairly furnishes all the objective material facts as to enable a reasonably prudent stockholder to make an informed investment decision is the federal purpose in the securities laws served. Mendell v. Greenberg, 927 F.2d 667, 674, amended, 938 F.2d 1528 (2d Cir. 1990). The point of a proxy statement ... should be to inform, not to challenge the readers critical wits. Virginia
5
While Defendants deny that there is sufficient evidence to satisfy any element of Section 10(b), Def. Br. at 30, they make no argument concerning reliance or transaction causation. See id. at 30-34. Those defenses are therefore waived. Ocean Partners, LLC v. N. River Ins. Co., 546 F. Supp. 2d 101, 106 (S.D.N.Y. 2008); Playboy Enters., Inc. v. Dumas, 960 F. Supp. 710, 720 n. 7 (S.D.N.Y. 1997); Am. Hotel Intl Grp., Inc. v. OneBeacon Ins. Co., 611 F. Supp. 2d 373, 375 (S.D.N.Y. 2009), affd, 374 F. Appx 71 (2d Cir. 2010). 8
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Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991). Materiality is typically a jury question. See TSC Indus., 426 U.S. at 450; RMED Intl, Inc. v. Sloans Supermarkets, Inc., 185 F. Supp. 2d 389, 400 (S.D.N.Y. 2002) (denying summary judgment) (collecting cases). Here, there is sufficient evidence from which a reasonable jury could conclude that Defendants made material misstatements to shareholders in the joint Merger Proxy Statements and other public statements before shareholders voted whether to approve the Sirius-XM merger on November 13, 2007. Defendants repeatedly issued broad, affirmative, and unqualified representations to shareholders, regulators, Congress, and the public alike that the Sirius-XM Merger would result in lower prices for consumers. P 56.1 173-182. These statements were not limited by their terms to the prices to be offered for new services which were only a subset of Siriuss satellite radio channels, P 56.1 173-182, nor did Defendants leave open the possibility that the prices for any existing services could be raised. To the contrary, Defendants denied the possibility that prices for existing services would increase as a result of the Merger, and they were emphatic that the price of existing core services such as basic subscriptions and multi-receiver subscriptions would not increase. P 56.1 173-182. Emblematic of these claims was defendant Sirius CEO Mel Karmazins assurances to Congress that I am telling you today that we are committed, we are committed to not raising prices and committed to in fact lowering the price. P 56.1 173(a). (emphases added). A reasonable jury could find that Defendants statements that the Merger would lead to lower prices or at least stable prices were false or had no reasonable basis when made. Defendants have admittedthrough their submission on report prepared by their expert, Michael Baye, Ph.D., in this litigationthat Sirius, before the Merger, had plans to raise prices due to continuing cash flow problems and mounting losses:
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[b]oth [Sirius and XM] had plans to increase the basic subscription price from $12.95 to at least $14.99 per month. Sirius and XM also had pre-merger plans to increase multi-radio rates/family rates, Sirius had plans to increase internet streaming rates and XM had plans to impose a royalty fee in the absence of the merger. P 56.1 186(a)-(e). 6 And even apart from this admission, there is abundant evidence that beginning in 2005 and continuing until well after the Merger was announced, the Board had in place concrete plans to raise the monthly price of a basic subscription (from $12.95 to $14.95 or more), to raise the monthly price of a multi-receiver subscription (from $6.95 to $7.95 or more), and to raise the monthly price for an Internet streaming subscription (from $0 to $2.99 or more). P 56.1 180-181. Indeed, the Board of Directors approved a final 2007 budget for Sirius on January 23, 2007, which, at the Boards request, was premised upon substantial increases in the prices of all three of these core services. P 56.1 180(f), 180(h). 7 Defendants protest that their statements did not promise that the post-merger company would lower all prices and then maintain them in perpetuity, and they suggest that lower prices referred merely to new, partial-channel and other subscription plans involving fewer than all of Siriuss existing satellite radio channels. Def. Br. at 31. However, a reasonable jury could find that Defendants statementsthough sometimes discussing new, partial-channel plans
See Fed. R. Evid. 801(d)(2)(B); In re Chicago Flood Litig., No. 93 C 1214, 1995 WL 437501, at *11 (N.D. Ill. July 21, 1995) (denying in limine motion to exclude expert evidence; opposing partys expert report constituted admission which would be strongly probative); Envtl. Conserv. Org. v. Bagwell, No. 4:03-CV-807-Y, 2005 WL 2415957, at *1 n.1 (N.D. Tex. Sept. 28, 2005). Of course, there can be no hearsay objection to Plaintiffs reliance on Defendants own expert. Samaritan Health Ctr. v. Simplicity Health Care Plan, 459 F. Supp. 2d 786, 799 (E.D. Wis. 2006). 7 The evidence indicates that the plan to increase prices for these core services was put on hold after the Merger was announced, but that this was done, in part, to avoid regulatory scrutiny. P 56.1 188. Indeed, almost as soon as the Merger was approved in July 2008, the plans to increase on core services were reactivated. P 56.1 191, 195-196. 10
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nowhere stated that the lower prices referred only to such plans. See P 56.1 173-182. 8 Moreover, a reasonable jury similarly could find that Defendants repeated assurances of lower prices foreclosed the possibility that Karmazin and the Board were, as was in fact the case, planning to increase the prices for core services. Similarly, Defendants urge that the statements concerning lower prices merely constituted projections which cannot be actionable under the securities laws. Def. Br. at 32. However, there is a difference between enthusiastic statements amounting to general puffery and opinion-based statements that are anchored in misrepresentations of existing facts. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000). See also Bank of Am., 757 F. Supp. 2d at 310. Thus, even if deemed to be opinions or projections, a jury could find Defendants assurances of lower prices lacked a reasonable basis in fact. See Novak, 216 F.3d at 315; Goldman v. Belden, 754 F.2d 1059, 1068-69 (2d Cir. 1985); Bank of Am., 757 F. Supp. 2d at 290 (S.D.N.Y. 2010). Even prospective or contingent statements, if reasonably unlikely to occur, are actionable. See Wilson v. Great Am. Inds., Inc., 855 F.2d 987, 992 (2d Cir. 1988); San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 810 (2d Cir. 1996). 9
The sole statement which arguably links the representation of lower prices to new, partial-channel plans, is contained within Sirius and XMs Joint Opposition to Petitions to Deny and Reply Comments of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc. (Joint Opposition), filed with the FCC on July 24, 2007. See P 56.1 178. However, there is no evidence that the Joint Opposition was disclosed to shareholders. P 56.1 173,174. See United Paperworkers Intl Union v. Intl Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993) (merely filing with a regulatory agency documents containing factual information material to a proposal for which proxy votes are sought does not constitute adequate disclosure). Moreover, the Joint Opposition affirmatively represented that the prices of basic and multi-receiver subscriptions would not increase. P 56.1 179,180. 9 Plaintiffs argument, of course, does not depend on Defendants having had an independent duty to disclose internal plans to raise prices on core services. However, where such plans existed, Defendants were under a duty to speak truthfully or abstain from speaking in an unqualified way that post-Merger prices would be lower or stable. See Caiola v. Citibank, N.A., 295 F.3d 312, 331 (2d Cir. 2002); In re Credit Suisse First Boston Corp. Sec. Litig., No. 97 11
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2.
Scienter
The evidence could also lead a reasonable jury to conclude that Defendants acted with scienter in this case. Scienter can be established either: (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud; or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 538 (2d Cir.1999). Scienter is quintessentially a jury question. Anderson v. AT & T Corp., 07 Civ. 5913 (MGC), 2010 WL 1780953, at *2 (S.D.N.Y. May 4, 2010) (denying motion for summary judgment on securities claim; [d]efendants rely on testimony, but the credibility of the deponents is not an undisputed fact). Moreover, [t]he Second Circuit has been lenient in allowing scienter issues to withstand summary judgment based on fairly tenuous inferences. Whether a given intent existed is generally a question of fact, appropriate for resolution by the trier of fact. Press, 166 F.3d at 538 (2d Cir. 1999) (citation omitted). See also In re Kidder Peabody Sec. Litig., 10 F. Supp. 2d 398, 415 (S.D.N.Y. 1998); In re Columbia Secs. Litig., 155 F.R.D. 466, 479 (S.D.N.Y. 1994) (scienter generally requires examination of a witnesss demeanor and credibility). Finally, recklessness may be established where it is proven that the defendants knew facts or had access to information suggesting that their public statements were not accurate, as long as the plaintiff specifically identifies the sources of the defendants access to contrary facts. Novak, 216 F.3d at 309, 311; see also Bank of Am., 757 F. Supp. 2d at 323. Under such circumstances, the defendants knew or, more importantly, should have known that they were misrepresenting material facts related to the corporation. Novak, 216 F.3d at 308. Moreover, as this Court has previously observed,
Civ. 4760 (JGK), 1998 WL 734365, at *6 (S.D.N.Y. Oct. 20, 1998); Bank of Am., 757 F. Supp. 2d at 295, 297-98 (same). 12
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a number of courts have found that officers and directors recklessly disregarded the truth when their companies made, and they failed to correct, statements that contradicted reasonably available data and that concerned major transactions or touched upon the heart of their companies businesses. Shenk v. Karmazin, No. 11 CIV. 2943 (JSR), 2011 WL 5148667, at *7 (S.D.N.Y. Oct. 28, 2011) (citing cases). Defendants do not dispute that the Sirius-XM Merger was the most significant transaction in Siriuss history. Plaintiff has identified strong circumstantial evidence of conscious misbehavior or recklessness. When they made statements that the Merger would result in lower prices and would in no event result in price increases, Defendants were well aware that Sirius had been working for years on plans to implement price increases for its core services; the Board itself even approved a final budget for 2007 which, at its request, had included increased revenues premised upon such price increases. P 56.1 186(d)-(f). Thus, a reasonable jury could find that Defendants knew of facts specifically controverting their public statements about prices. See, e.g., RMED, 185 F. Supp. 2d at 403-04 (genuine issue of material fact existed as to whether corporation and its chief executive officer had requisite scienter to commit fraud, given evidence that defendants knew of FTC investigation and misrepresented and omitted this information from SEC filings), recon. denied, 207 F. Supp. 2d 292, 299 (S.D.N.Y. 2002) (same); In re Pfizer Inc. Sec. Litig., 584 F. Supp. 2d 621, 639-40 (S.D.N.Y. 2008) ([h]aving established the sufficiency of Plaintiffs allegations as to materiality as well as the Individual Defendants knowledge, the question of scienter is implicitly resolved). Additional circumstances support a finding of recklessness by each of the Section 10(b) Defendants here. For example, the scienter of Karmazin is especially in issue because several of the statements concerning prices were made directly by him, including statements in the Merger
13
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Proxy Statement, which he signed. P 56.1 171(a), (c), (h), (j), (l), (n), (p), (r), (t), (u); 174. 10 Similarly, Parsons admitted in private e-mail correspondence to a family member that were basically waffling when asked specifically about price decreases. P 56.1 187 (emphasis added). As for the overall Board of Directors (including Karmazin)at the precise times during 2007 when it was making sweeping statements to shareholders, the FCC, and Congress guaranteeing that prices for core services would not increase and that the Merger would unqualifiedly lead to lower pricesSirius was being investigated by the FCC for knowingly and repeatedly failing to comply with the Commissions requirements concerning FM modulators and terrestrial repeaters. P 56.1 205. The FCC investigation was only resolved when Sirius and XM jointly agreed to pay a $19.4 million fine in July 2008the second largest in FCC historywith the FCC severely reprimanding Sirius for the apparently intentional nature of many of the violations. P 56.1 46. 11 In addition, there is evidence that Karmazin and other Sirius directors, while well aware of a FCC order requiring the Company to develop and commercialize an interoperable radio unit (and notwithstanding the fact that the FCC later
10
Further, Karmazin had a material and personal financial interest in the Merger that materially exceeded that of any shareholder. For example, if Mr. Karmazins employment contract were renewed in November 2009 when his previous contract expired, he stood to gain significantly in the form of higher salary and options grants from a combined company that was twice the size of legacy Sirius, as in fact happened. P 56. 1 231-233. 11 The Complaint alleged that the FCC fine was for $17.4 million and that the fine concerned Siriuss failure to market an interoperable radio receiver. Ex. 10 64-67. Discovery has disclosed that the fine, imposed on both Sirius and XM, did not concern interoperable radio but rather issues concerning the location of terrestrial repeaters (ground units) and the frequency emissions of certain modulators within Sirius radio units. However, this does not change the fact of the gargantuan amount of the fine or the intentional nature of the FCC rule violation, which this Court previously held imposed upon Defendants a good faith obligation to investigate whether, by repeatedly claiming that the merger would result in the same price or lower prices, . . . the company was once again committing a serious infraction in its dealings with the FCC. Shenk, 2011 WL 5148667, at *5. Thus, Defendants argument that Defendants prior dealings with the FCC do not support a finding of bad faith (Def. Br. at 20-21) is wrong. 14
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declined to impose a fine in connection with Defendants actions concerning it 12 ), consciously failed to comply with that order. P 56.1 205. See Shenk, 2011 WL 5148667, at *6 (Given Sirius history of false statements to the FCC, and the inherent unlikelihood that it could fulfill its new promises to the FCC and its shareholders, the complaint adequately alleges bad faith on the part of the members of the board who approved the merger.). 3. Loss Causation and Injury
Defendants do not dispute that, for a plaintiff to maintain a derivative action for damages under Rule 10b5 he must show damage to the corporation by the fraud as required by section 28(a) of the Act, 15 U.S.C. 78bb(a) (1982). See Bank of Am., 757 F. Supp. 2d at 293-92; J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964). Here, Plaintiff has come forward with evidence that Sirius XM was injured because Defendants actual pricing decisions after the Merger exposed the Company to antitrust liability. See infra, part III. There is also evidence establishing that as a direct consequence of the Merger, Sirius XM suffered damages resulting from financial distress (see P 56.1 234) in addition to increased internal and external costs to obtain such approvalincluding legal fees, advisory fees, diverted internal staff resources, and the likearising from Defendants prevarications concerning prices. See P 56.1 201. a. $193 Million in Antitrust Liability
Defendants do not and cannot contest that Sirius XM settled the Blessing action, which was premised precisely upon the pricing decisions set forth in the instant Complaintor that the Blessing settlement ascribes a value of at least $196 million (inclusive of attorneys fees to be paid in cash) to the consideration provided by Sirius XM in that settlement. See P56.1 236; see also D56.1 81. The parties, through their respective experts, vigorously dispute the amount of
12
See supra n. 11. 15
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damages to which this gives rise. Compare P56.1 236 with Def. Br. at 23-24. Accordingly, at a minimum, there is a genuine dispute as to the issue and amount of such damages. Instead, Defendants argue that, as a matter of law, this Court must find that it was not the Section 10(b) Defendants pre-merger statements but the Sirius XM Boards post-merger business decisions that allegedly created the risk of antitrust liability. Def. Br. at 33 (citing, inter alia, Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 174 (2d Cir. 2005)). Defendants cases do not support their argument. Under Lentell, the risk that caused injury, price increases in violation of the antitrust laws, was precisely within the zone of risk concealed by the misrepresentations, namely, that Sirius XM had concrete plans to increase prices on core services. See id. at 173. In these circumstances, loss causation and damages are very much at issue and inappropriate for resolution by the Court as a matter of law. See Exxon Co., U.S.A. v. Sofec, Inc., 517 U.S. 830, 840-41 (1996) ([t]he issues of proximate causation and superseding cause involve application of law to fact, which is left to the factfinder, subject to limited review); Wortley v. Camplin, 333 F.3d 284, 295 (1st Cir. 2003). b. $42 Million in Financial Distress
Plaintiff has set forth evidence in the form of expert testimony that the Merger resulted in at least $56 million in damages to Sirius XM in the form of costs of financial distress that arose largely from the assumption, through the Merger, of $2.1 billion in debt of its cash-poor competitor, legacy XM. See P56.1 235. Defendants summarily dismiss Plaintiffs expert and merely cite their own evidence that reductions in operating expenses for the combined company since the Merger have resulted in $825 million in efficiencies that exceed any costs such as financial distress. Def. Br. at 34 (citing El-Hage Report and D56.1 48); D56.1 48. The Court should reject this argument and preserve this issue for jury determination. To begin with, it relies in substantial part on the veracity of the expert report of Defendants own 16
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expert Nabil N. El-Hage, Ph.D. See Def. Br. at 34 (citing El-Hage Report). Dr. El-Hages report is unsworn and is inadmissible on a motion for summary judgment. See Fed. R. Civ. P. 56(c); U.S. v. All Right, Title & Interest in Real Prop. & Appurtenances, 77 F.3d 648, 657-58 (2d Cir. 1996). Even were it admissible, Dr. El-Hages report merely offers a competing interpretation of the costs and benefits resulting from the Merger. See In re Joint E. & S. Dist. Asbestos Litig., 52 F.3d 1124, 1135 (2d Cir. 1995) (Trial courts should not abrogate the jurys role in evaluating the evidence and the credibility of expert witnesses by simply choosing sides in the battle of the experts) (internal quotation marks and alterations omitted). Indeed, both Defendants and their expert reach their conclusions regarding cost savings resulting from the Merger by reference to evidence that need not be taken at face value by a jury. For example, Defendants cite the Declaration of Sirius XMs Corporate Controller, Thomas D. Barry for evidence of the supposed $825 million in savings. Def. Br. at 34. All that Mr. Barry has done, however, is to create a table containing some, but not all, of Siriuss, XMs, and Sirius XMs publicly-reported operating expenses from 2008 to 2011, and perform a simple subtraction of the total of the selected expenses in 2011 from the total of the same expenses in 2008. See Ex. 45 & exhibit thereto (discussing Selected post-merger cost savings). There are at least three infirmities with this procedure. First, the submission of evidence through Mr. Barry violates Fed. R. Civ. P. 37(c)(1), which provides, in relevant part, that: If a party fails to provide information or identify a witness as required by Rule 26(a) or 26(e), the party is not allowed to use that information or witness to supply evidence on a motion, unless the failure was substantially justified or is harmless. See Haber v. ASN 50th Street, LLC, 272 F.R.D. 377, 381 (S.D.N.Y. 2011) (failure to disclose the identity of witnesses during discovery may result in
17
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the court precluding those witnesses from being presented at trial). 13 Indeed, Defendants, despite an interrogatory requesting the identity of all witnesses with knowledge or information relating to the allegations of the Complaint or your defenses thereto, did not identify Mr. Barry. See P Ex. 14. Second, Defendants rely on Sirius XMs own calculations for these line items of operating expenses, which is inappropriate where, as here, the Boards truthfulness (including in its publicly-filed financial reports) has been put in issue. Third, Mr. Barry does not aver (nor is appropriate for anyone but a jury to decide) how much, if any, of the selected cost savings arose as the result of Merger as opposed to other causes, such as (to name but one) the severe recession that began immediately after the Merger closed on July 31, 2008 and imposed cost constraints on Sirius XM and every other U.S. company. D 56.1 86 Similar infirmities attend the evidence relied upon by Defendants expert in forming his opinion concerning cost savings arising from the Merger. See P. Ex. 170 (El-Hage Report) 13, 20-22, 25-26, 28-29. Like Mr. Barry, Dr. El-Hage relies, in part, on the differences, preand post-Merger, in selected costs reported by Sirius XM itself in SEC filings. See id. Ex. 1 thereto. Notably, Dr. El-Hage selects a different set of line items to include than the set chosen by Mr. Barry, which alone is enough to suggest that an issue for the jury to determine. Moreover, Dr. El-Hage uncritically ascribes the entirety of the cost-savings differential to efficiencies resulting from the Merger. See id. 23. The remainder of Dr. El-Hages evidence consists of internal documents and the report of an independent market analyst. Id. 22. A
13
As the Southern District has expressly recognized, [t]his preclusionary rule applies on motions for summary judgment. Fleming v. Verizon New York, Inc., No. 03 Civ. 5639 (WHP), 2006 WL 2709766, at *7 (S.D.N.Y. Sept. 22, 2006). See also Ebewo v. Martinez, 309 F. Supp. 2d 600, 607 n.2 (S.D.N.Y. 2004) (declining to consider an affidavit submitted in summary judgment briefing because the affiant was not listed on Rule 26(a) disclosures). The rationale for this Rule is obvious: to prevent sandbagging an opposing party with new evidence. Fleming, 2006 WL 2709766, at *7. 18
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jury, not the Court, should decide the weight to be given to these sources and Dr. El-Hages testimony. c. Additional Costs to Obtain Merger Approval
Defendants misrepresentations to the FCC that the Merger would lead to lower prices caused the Merger regulatory approval process to be substantially prolonged. From the beginning, the FCC questioned the accuracy of Defendants statements concerning lower prices. P 56.1 201. Only in June and July 2008, after a nearly 18-month review process, did Sirius and XM capitulated to make voluntary commitments to the FCC not to raise prices on these core services. P 56.1 199-200. FCC approval was expressly conditioned upon these voluntary commitments, as well as upon Sirius and XMs promises to pay a combined contribution to the United States Treasury of $17.5 million. P 56.1 199. Siriuss CFO David Frear admitted that the FCC extracted from us, in order to secure its approval of the merger, a voluntary commitment to not increase the basic price of $12.95 for three years following the merger. P 56.1 200 (emphasis added). The prolongation of the FCC approval process due to the implausibility of Defendants statements concerning lower prices and the necessity of negotiating and furnishing voluntary commitments not to raise prices had tangible, out-of-pocket effects on XM, including over $20 million in additional G&A expenses due to the FCC voluntary contributions and merger related expenses as of August 8, 2008. P 56.1 201. The same was likely true at Sirius, and Plaintiff should be afforded to adduce this evidence at trial. See id. B. Breach of the Delaware Duty of Full Disclosure to Shareholders
Delaware law imposes upon a Board of Directors the fiduciary duty to disclose fully and fairly all material facts within its control that would have a significant effect upon a stockholder
19
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vote. Turner v. Bernstein, No. 16190, 1999 WL 66432, at *5 (Del. Ch. Feb. 9, 1999); Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992); Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1059 (Del. Ch. 1987); Bershad v. CurtissWright Corp., 535 A.2d 840, 846 (Del. 1987) (the defendants retain the burden of proving complete disclosure of all material facts relevant to the merger vote). The duty of disclosure is breached when a materially false statement is made. In re Santa Fe Pac. Corp. Sholder Litig., 669 A.2d 59, 66 (Del. 1995). To determine whether a director has satisfied the fiduciary duty of disclosure, the question is one of materiality. Bershad, 535 A.2d at 846; Smith v. Van Gorkom, 488 A.2d 858, 890 (Del. 1985); Caruso v. Metex Corp., No. CV 89-0571, 1992 WL 237299 (E.D.N.Y. July 30, 1992). As Defendants concede, the Delaware duty of disclosure fully applies to the claims in this case, where Plaintiff has alleged misstatements by Defendants concerning prices for its core satellite radio services in connection with seeking shareholders approval of the Merger. See Def. Br. at 17. As Defendants also concede, the duty of disclosure is breached when a materially false statement is made. Id. Finally, Defendants recognize that, although there are circumstances in which Defendants are exculpated by Siriuss Certificate of Incorporation for breach of the duty of care, if they are shown to have acted in bad faith or engaged in intentional misconduct or knowing violation of law, they may not avoid liability. See id. To establish liability, Plaintiff must prove that Defendants knowingly or deliberately failed to disclose facts that they knew were material. Frank v. Arnelle, No. CIV. A. 15642, 1998 WL 668649, at *10 (Del. Ch. Sept. 16, 1998).
20
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Here, there is evidence from which a jury could conclude that Defendants repeatedly disseminated materially false statements concerning lower prices (and especially prices for basic and multi-receiver subscriptions that would not increase) in connection with seeking regulatory and shareholders approval of the Merger. See supra, part II(A)(1)-(2). At the time these statements were made, Defendants knew that they had been planning for several years to increase prices for basic, multi-receiver, and other subscription services by significant amounts, and the Board had directed that a budget be prepared premised upon such price increases. P 56.1 186(d)-(f). 14 Although these price increases were put on hold until after the Merger was announcedin part to avoid additional regulatory scrutiny of the Mergerthe price-increase plans were resumed virtually as soon as Merger approval was obtained and have since been put into effect. P 56.1 189,191-196. Defendants knowledge of these facts is directly contrary to their public statements thus establishing not only a jury issue regarding material falsity of these statements but also a jury issue regarding whether Defendants caused the statements to be made knowingly, willingly, or in bad faith despite the material falsity of those statements. See In re Transkaryotic Therapies, Inc., 954 A.2d 346, 356 (Del. Ch. 2008) (for breach of the duty of disclosure claims, Delaware courts have adopted the federal standard for materiality). Finally, contrary to their argument (Def. Br. at 17-18), Defendants are not exculpated from liability for breach of fiduciary duties in this case, notwithstanding a provision in Siriuss Certificate of Incorporation tracking Section 102(b)(7) of the Delaware General Corporation law. First, by its terms, Section 102(b)(7) does not immunize directors if they are
14
For example, an increase in the price of a basic subscription from $12.95 to $14.95 would constitute a 15.5 percent increase, and an increase in the price of a multi-receiver subscription from $6.99 to $8.99 would constitute a 28.6 percent increase. 21
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shown to have acted in bad faith or engaged in intentional misconduct or knowing violation of law. Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001). Moreover, Section 102(b)(7) bars a claim only if there is an unambiguous, residual due care claim and nothing else. See id. Here, Defendants actions, if proven, would constitute both breaches of the duty of loyalty (including the duty of good faith) and breaches of the duty of care. See Shenk, 2011 WL 5148667, at *4. To establish liability, Plaintiff must prove that Defendants knowingly or deliberately failed to disclose facts that they knew were material. Frank v. Arnelle, 1998 WL 668649, at *10. As shown above, a jury question is presented concerning whether Defendants misstatements concerning post-Merger prices were made knowingly, willingly, or in bad faith. In all events, the duty of disclosure claim can go forward against Karmazin on a simple duty of care basisi.e., without evidence of disloyalty or bad faith. This is because Section 102(b)(7) does not exculpate defendants who are both officers and directors for actions taken solely in their capacity as officers. See Arnold v. Socy for Sav. Bancorp, 650 A.2d 1270, 1288 (Del. 1994); R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corp. & Business Org. 4.19, at 4-335 (Supp. 1992). The evidence indicates that Karmazinwho signed the joint Merger Proxy Statement and the Merger Agreement solely as Chief Executive Officer, and not a director, of Siriuswas acting in his role as an officer only. P 56.1 173(p). 15
Defendants remaining arguments concerning the duty of disclosure claims involve identical causation and damages issues raised with respect to the Section 10(b) claim. Def. Br. at 21. These arguments were addressed supra, part II(A)(3). 22
15
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III.
GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS POST-MERGER PRICE INCREASES A reasonable jury could find that Defendants breached their fiduciary duties by causing
Sirius, once the Merger was actually approved premised upon misrepresentations to regulators, to abuse its monopoly power and raise prices and fees charged to its subscribers in the absence of competition. Defendants make a number of straw-man arguments, founded chiefly upon the supposed protections of the business judgment rule. A. The Business Judgment Rule and its Limitations
While true under Delaware law that directors, in making a business decision, are presumed to have acted on an informed basis . . . and in the honest belief that the action was taken in the best interests of the company, In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 747 (Del. Ch. 2005), the business judgment rule is not absolute and can be rebutted by a showing that the board violated one of its fiduciary duties[.] Id. To do so, a plaintiff need only show that directors acted with gross negligence, not that they knowingly or willfully breached their fiduciary duties. Auburn Chevrolet-Oldsmobile-Cadillac, Inc. v. Branch, No. 5:06-CV0362 (GTS/GJD), 2009 WL 667430, at *13 (N.D.N.Y. Mar. 10, 2009). Moreover, knowing failure to act in the best interests of shareholders negates application of business judgment protection. See Disney, 907 A.2d at 755. B. The Business Judgment Rule does not Immunize Defendants Conduct
There is substantial evidence from which a jury could conclude that Defendants acted in bad faith or otherwise consciously disregarded their duties to act in the best interests of Sirius and its shareholders as a result of their misrepresentations to the FCC, improperly raising prices contrary to what they represented to the FCC and, consequently, being sued in a class action for
23
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violations of the antitrust laws. Therefore, Defendants should not be afforded protections under the business judgment rule. 1. Defendants Lies to the FCC in Order to Secure Approval for the Merger
To effectuate the merger, Defendants caused Sirius to file a Joint Application and a Joint Opposition with the FCC for permission transfer control of the FCC licenses held by Sirius and XM or their subsidiaries. D Ex. 36, at 1. These documents, however, were replete with misrepresentations about Sirius inability and unwillingness to raise prices despite Defendants knowledge that the Company would have to do so to. See supra, part II; P 56.1 173(e)-(i), 175-180, 183-190. Defendants try to recharacterize the FCC submissions as having made only marginal promises regarding new, partial-channel subscriptions. See Def. Br. at 7, 15, 18. In so doing, they ask the Court to construe every inference in their favor, rather than in favor of Plaintiff as the non-moving party. The bottom line is that Sirius emphatically assured the FCC that no satellite radio subscriber will have to pay moreas a result of the merger. D Ex. 43, at 11-12 (FCC Approval Order) (emphasis added). Given Defendants specific plans to raise prices on basic subscriptions well after the Merger was announced, given their decision to raise prices at the earliest opportunity after the Merger, and given Defendants repeated instances of disregarding FCC mandates (see P 56.1 186(a)-(g), 187, 191-198, 204-206), a reasonable jury could well find that Defendants dissembled to the FCC concerning post-Merger prices and otherwise acted in bad faith and against the Companys best interests. Defendants, however, contend that Sirius complied with the letter of the voluntary restrictions because Sirius subsequently offered partial-channel packages at a lower price than the basic subscription price and a best of package at a premium to basic, while not raising the
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price of basic. Def. Br. at 8, 22. While Defendants harp on the fact that the basic subscription fee was not raised until January 2012, it was only the express commitment in the FCC approval process (and, later, the Blessing settlement) that apparently kept this one price stable. Defendants effectively treat the Voluntary Commitments as an upper bound, or ceiling, on price commitments. Yet, as the FCC Approval Order makes clear, Sirius also promised to keep the multi-receiver subscription price stable, and did not do so. D Ex. 38, at 14. Moreover, Defendants other price increases violated the spirit of the Order because the FCC had specifically premised it upon the Merger incentivizing lower prices overall. D Ex. 43 at 44-47, 88, 91. Defendants merely offer one interpretation of the reasonable bounds for complying with the FCC Order that need not be believed by a jury. Moreover, the Board cannot claim ignorance of the mandates issued in the FCC Order. To the contrary, there is significant evidence that Board members were well aware of the requirements imposed on the combined Company through the FCC Order. Karmazin advised the Board about the conditions contained in the FCCs order and how those conditions affect, and are likely to affect, the Corporations operations. D Ex. 58 at *6030; see also P Ex.99 at 116:12-118:13. In response, the Directors themselves raised the possible results of a passthrough price increase and a decrease in the discount for multi-subscriber units in 2009 as to subscribers and the Corporations cash position. D Ex. 58 at *6030. In other words, after being advised about the FCC Order, Sirius Board immediately sought to circumvent the price cap. 2. Causal Link Between Defendants Lies to the FCC and Subsequent Price Increases
A jury similarly could find that Defendants misrepresentations played a causal role in securing approval for the Merger, in attaining monopoly power, and in raising prices. FCC approval for the Merger was, by its terms, conditioned on Siriuss observance of the so-called
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Voluntary Commitments not to raise certain prices. D Ex. 43 at 5, 81. The order also was conditioned on Siriuss representations that the price of basic and multi-receiver subscriptions ($12.95 per month) would not be raised. Id. at 46, 99, 91; see also D Ex. 38 at 14. In fact, as part of its ploy to secure FCC approval of the merger, Defendants caused Sirius to specifically represent that [s]ubscribers will be able to continue their $6.99 multi-receiver subscriptions. D Ex. 38, at 14. Despite these commitments, Sirius customers experienced backdoor price hikes through higher fees and through the reduction of certain discounts. Defendants instituted price increases practically as soon as the Merger was consummated. No later than September 17, 2008approximately six weeks after the MergerSirius executives worked through a plan to include a $2.99 streaming charge and a $2 increase in the price for a multi-receiver subscription. See P 56.1 191; P Ex. 59; P Ex. 67, at 11, 21; P Ex. 96, at 122. In addition, less than three weeks later, on October 1, 2008, Sirius confirmed it already had a plan in place for several price increases, including the Internet streaming charge to become effective March 1, 2009. P 56.1 191, 195-197; see also P Ex. 62. These price increases and new fees, while in play within months after the merger was approved, were never disclosed to the FCC during the merger approval process. As such, within a mere six months after the merger, Sirius began announcing increases to several of its prices and imposing new fees, especially on newly acquired XM customers, such as a hike on multi-subscriber accounts from $6.99 to $8.99, charging $2.99 for all subscribers accessing Sirius or XM programming via the Internet, a $75 cancellation fee for XM subscribers who cancelled a one-year or longer subscription during the first year of service, a $15 transfer fee to most XM subscribers, a $75 transfer fee for certain
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lifetime subscribers and an increase in the price of XMRO from $7.99 to $12.95. 16 See P 56.1 186 (d)-(f); 191-197. The decision to boost prices and fees was not made in a vacuum and the Board was fully complicit in their implementation. As such, the evidence discloses that the Board was presented with these price hikes during Board meetings by, among others, Frear and Witz. 17 This was not disputed by Amble who stated that management from time to time if there were pricing actions that were going to be taken we would bring it to the board and there would be a discussion. P Ex. 97 at 114. In fact, management informed the Board about all pricing actions before they were implemented. Id. Significantly, the Board was not only made aware of the pricing actions, it ultimately approved them. For instance, in response to whether the Board was aware of the reduction in the discount for multi-subscriber accounts, Mr. Parsons testified that [t]he board approved all significant pricing actions, including this one. P Ex. 101, at 62, 63. See also P 56.1 195-97. Defendants contend that raising fees lies within the purview of sound business judgment. Def. Br. at 22, 23. In isolation, that may be true. Here, however, Defendants conduct with respect to lying to the FCC about offering lower prices and the subsequent price hikes that they caused Sirius to implement are inextricably tied together in demonstrating Defendants gross negligence and bad faith. In other words, the misrepresentations were only realized once Sirius actually raised prices, and it was raising prices in the context of emphatic promises not to do so that constituted, in part, the breaches of Defendants duties of due care and good faith. Disney, 907 A.2d at 750, 755.
16 17
See P Ex. 98 at 86-87; P Ex. 101, at 62, 63, 65; P Ex. 60; P Ex. 93 at 151:7-19; P Ex. 63. D Ex. 65 (Mr. Frear and Ms. Campbell spoke to the directors about the price increases planned in 2009, and the risks associated with the price increase and Mr. Meyer reviewed with the directors the rate increases proposed during 2009[.]). 27
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Indeed, there is significant evidence from which a reasonable jury could find that Defendants knew at the time they were seeking regulatory approval that, following the Merger, Sirius XM would significantly increase fees and impose new fees, contrary to the representations made to the FCC. Recklessly misrepresenting material information to the FCC which provided a basis for not objecting to the Merger, and raising prices contrary to the representations at the soonest possible opportunity constituted conduct falling squarely outside the boundaries of business judgment protection. See, e.g., Disney, 907 A.2d at 755 (where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, bad faith is established); Metro Commcn Corp. BVI v. Advanced Mobilecomm Techs., Inc., 854 A.2d 121, 163-64 (Del. Ch. 2004) (finding that directors had violated their duties of loyalty if they had engaged in unlawful bribery); Miller v. American Tel. & Tel. Co., 507 F.2d 759, 762 (3d Cir. 1974) (where directors failed to collect debt in accordance with law, they were not insulated by the business judgment rule). C. Defendants Conduct Arising from Their Misrepresentations to the FCC and Improperly Raising Prices Resulted in the Blessing Antitrust Matter and Injury to Sirius
As Defendants caused Sirius to pile on new fees and raise other existing fees in order to service its huge debt resulting from the merger, Defendants knew that the Company faced substantial liability for antitrust violations culminating in a civil suit filed in December 2009. 18 Potential liability resulting from the Blessing action was more than a hypothetical situation and one which could, and did, cause substantial injury to the Company. The claims in the Blessing action not only survived a motion to dismiss but the Court also certified a class and denied summary judgment on most of antitrust claimscompelling Defendants to settle the remaining
18
See Blessing v. Sirius XM Radio Inc., Civ. No. 1:09-cv-10035-HB (S.D.N.Y.) (Blessing). 28
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claims in the aggregate amount of $196 million. D Ex. 44. Defendants settlement of the Blessing suit does not immunize them for liability for the misconduct which gave rise to it. Defendants cannot act loyally as [] corporate director[s] by causing the corporation to violate the positive laws it is obliged to obey. Guttman v. Huang, 823 A.2d 492, 505 n.34 (Del. Ch. 2003). 19 Defendants misconduct resulted in the Company being sued by customers for violations of the federal antitrust laws in which was obliged to pay $196 million (including attorneys fees and prejudgment interest) to obtain a release. See D Ex. 169, 26, 28; P Ex. 106. See also P 56.1 236. Contrary to Defendants insinuations throughout this litigation, therefore, Plaintiffs allegations in this lawsuit are not simply a clone of Blessing, and Defendants are not entitled to shield themselves from the effects of their anticompetitive behavior on the theory that there can be no liability simply for being sued. See Def. Br. at 22, 23. 20 Finally, without any legal support, Defendants contend that their illegal conduct benefitted Sirius financially by approximately $250 million which is more than the $193 million
19
See also Miller, 507 F.2d at 762; Wilshire Oil Co. of Tex. v. Riffe, 409 F.2d 1277, 1286 (10th Cir. 1969) (holding that claims can be brought by corporation against employees whose antitrust violations subjected it to liability); Rogers v. American Can Co., 187 F. Supp. 532, 536 (D.N.J. 1960) (any derivative suit which involves antitrust violations almost necessarily must involve some breach of fiduciary duty or mismanagement by officers or directors, since they have guided the corporation into activities which violate the law, or at the very least, have acquiesced in such conduct); Di Tomasso v. Loverro, 293 N.Y.S. 912, 916-17 (N.Y. App. Div. 1937), affd mem., 276 N.Y. 551 (N.Y. 1937) (it was proper to grant injunction and impose liability on directors for damages, in derivative action, where they knew, or should have known, the contract was in restraint of trade). 20 Defendants selectively quote language from this Courts Oct. 27, 2011, Order, which addressed the sufficiency of plaintiff Jeffrey Goes allegations. See Shenk, 2011 WL 5148667, at *2 (Mr. Goes reliance on Blessing, without more failed to identify the factual basis of the wrongful acts. In contrast, with respect to Mr. Shenks post-merger pricing claims, the Court found that [g]iven Sirius history of false statements to the FCC, and the inherent unlikelihood that it could fulfill its new promises to the FCC and its shareholders, [Mr. Shenks] complaint adequately alleges bad faith on the part of the members of the board who approved the merger. Id. at *6. 29
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value Plaintiffs expert assigns to the Blessing settlement. Def. Br. at 24. 21 While Plaintiff disputes the amount of any financial benefit to Sirius XM from Defendants conduct in violation of the antitrust laws (see P 56.1 237) and the admissibility of Defendants evidence in this regard (see supra, part II(A)(3)(b)), even assuming there were such a benefit, the amount is irrelevant as Sirius cannot justifiably claim to be entitled to profit from violating the antitrust laws. This runs afoul of the principle under Delaware law that a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity. Metro Communication, 854 A.2d at 131; see also In re Syncor Intern. Corp. Shareholders Litig., 857 A.2d 994, 997 (Del. Ch. 2004) (although the immediate effect of the misconduct might have been to benefit [the company] through increased sales and profits, there is no mistaking that the alleged misconduct caused substantial injury to [the company], which became the focus of multiple criminal and civil proceedings.). Moreover, Defendants position was flatly rejected in Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993), where the Delaware Supreme Court articulated that the business judgment rule can be rebutted without any requirement of proof of injury. Id. at 371. To require proof of injury as a component of the proof necessary to rebut the business judgment presumption would be to convert the burden shifting process from a threshold determination of the appropriate standard of review to a dispositive adjudication on the merits. Id.
Contrary to Defendants improper characterization, Plaintiffs expert Adam Werner, Ph.D., did not concede that benefits arising from the Merger were eclipsed by post-Merger cost savings. See D Ex. 166, at 334. Rather, Dr. Werner distinguished between alleged efficiencies and net benefits to the company, and testified that the alleged efficiencies were not relevant to my damage analysis. Id. Finally, Dr. Werner specifically qualified his statements about any alleged efficiencies, limiting any statement to efficiencies discussed in those documents. Id. See also, Myers Ex. 1 at 9 (discussing the alleged synergies). 30
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IV.
GENUINE ISSUES OF MATERIAL FACT PRECLUDE SUMMARY JUDGMENT ON PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS BIAS IN FAVOR OF THE MALONE TRANSACTION Sirius acquired over $3.3 billion in debt because of the mergerwith over $1 billion of it
due by the end of 2009. P Ex. 60 at *527. Charles Ergen, the CEO of EchoStar and DISH Communications (Echostar/DISH), held nearly half of all of Sirius debt set to mature in 2009. As such, he held virtually all of the $175 million of debt that matured on February 17, 2009 and an additional $225 million in debt that matured in December, 2009. P Ex. 78 at *648. To pay off this debt the Board entertained offers from two parties, Ergen and John C. Malone, the CEO of Liberty Media Corporation, in February and March of 2009. However, there is evidence that the playing field was tilted in favor of Malone despite more favorable terms offered by Ergen. In fact, Ergen made three separate offers (Ergen I, Ergen II and Ergen III) that would have benefitted Sirius XM more than the Malone offer (Malone Offer), but each of Ergens offers was spurned in favor of the Malone Offer. Far from being undisputed, there is evidence from which a reasonable jury could conclude that Defendants failed to give due consideration to the various Ergen proposals, especially Ergen III, that were superior to the Malone Offer. See P 56.1 222-226. This evidence, if believed by a jury, would show Defendants disregard for the best interests of the Company and its shareholders, motivated by their self-serving desire to entrench themselves on the Board. A. Evidence that Defendants Breached their Fiduciary Duties under Revlon by Rejecting Ergen I
Directors of a public company are to be single-minded in achieving the highest value per share in situations when a transaction results in a sale of or even a contemplated sale or change in control of the corporation. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173
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(Del. 1986); Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (We believe that the general principles announced in Revlon govern this case and every case in which a fundamental change of corporate control occurs or is contemplated)(emphasis added). Given the significance of a change in control transaction, the Court will subject the directors conduct to enhanced scrutiny to ensure that it is reasonable. Id.; Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1287 (Del. 1989) citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954-955 (Del. 1985) (Directors may not act out of a sole or primary desire to perpetuate themselves in office.) Defendants fiduciary duties under Revlon were triggered when Ergen made his first offer that sought a 51% equity stake as issues of corporate control were at stake and a change of corporate control [was] contemplated. Defendants, by rejecting Ergen I outright, ignored their duties for their own benefit, specifically to perpetuate themselves in office and to secure entrenchment on the Sirius XM Board. To defend their decision to select the Malone Offer over Ergen I, Defendants engage in post hoc rationalizations and ignore the testimony provided by defendant Karmazin and the contemporaneous documents produced in discovery. See Def. Br. 26-28. The record paints a far different picture. 1. Ergen I Offer with 51% Equity Stake vs. Malone Offer
The first offer the Board dealt with was Ergen I, a $650 million loan with interest rates between 10.5% and 14%. D Ex. 155 at *641. 22 Ergen I would have involved Ergen acquiring a 51% stake in Sirius XM, thereby triggering a change in control. Id.
Citi, on behalf of EchoStar, originally submitted a proposal to Evercore (a financial advisor to Sirius XM) on January 18, 2009 (D Ex. 99), and Citi provided a revised proposal on January 30, 2009 to Evercore (D Ex. 111). On January 22, 2009, Sirius XM and its advisors met in person with EchoStar and its advisors to discuss the potential transaction. Karmazin made it clear to Sirius XM CFO, David Frear, that the meeting was not to take place at Sirius XM and 32
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Defendants argue that Ergen refused to commence [non-public due diligence] before the parties reached agreement. Def. Br. at 11. This is belied by the evidence. On February 4, 2009, Anwar Zakkour, a Managing Director at Sirius advisor J.P. Morgan, recapped a conversation that he had had that day with Ergen about a possible deal. In that conversation, Ergen stated that the Echostar/DISH team was willing to sign a Non-Disclosure Agreement (NDA) and to fly to New York City as soon as tomorrow to engage and start the process. This was hardly a refus[al] to commence [non-public due diligence] before the parties reached agreement, as Defendants now contend. P Ex. 71. 23 Ergens team followed through on this urgency by flying to New York on February 5, 2009 for an all-hands meeting with [Sirius XMs] key principals, bankers and legal counsel. P Ex. 72 at *385. Karmazin reported this development to the Board but nonetheless advised the Board that management was doing everything that needs to be done to be ready for a [bankruptcy] filing if that becomes necessary. Id. at *383; P Ex. 104 at 178:9-179:10. In the same e-mail that Karmazin reported to the Board on the Ergen I offer status, he also informed the Board that Liberty signed [an] NDA and [was] working on due diligence. P Ex. 72 at *383. Malone made his offer was on February 7, 2009 (subsequently revised on February 10, 2009), for approximately $530 million in two phases. See D Exs. 123 and 134. In exchange for providing this financing, Liberty would receive convertible preferred shares of Sirius XM, which could be converted into 40% of Sirius XMs common stock. This was effectively a lifeline that
that Karmazin would not be attending. (D Ex. 105). It was clear from the beginning of the negotiations that Karmazin wanted nothing to do with Ergen or EchoStar. 23 When questioned at his deposition about Ergens willingness to sign an NDA, Karmazin testified, I dont recall. P Ex. 104 at 156:13-21. This testimony conflicts with the contemporaneous documents produced by Defendants, and creates, at minimum, a genuine material issue of fact as to Ergens diligence and urgency in attempting to strike a deal with Sirius XM. 33
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Karmazin and the Board needed to save their Board seats, as the Ergen proposal included a 51% equity stake for Ergen, as compared to the Malone Offer, which would not have resulted in a change of control and which would have (and did) allow Karmazin and the Board to retain their seats. While Defendants now seek to portray Ergen I as inferior to the Malone Offer, both documentary evidence and current Karmazin testimony suggest otherwise. For example, [o]ne major debt holder said the terms of the [Ergen] bid were superior because they gave Sirius [XM] more long-term [financial] flexibility which in and of itself provides economic value. P Ex. 79 at *758. During a February 4, 2009 Board meeting, Karmazin and the Board discussed areas in which the [Ergen] proposal was attractive or not attractive in managements view and the merits and difficulties with the EchoStar proposal. D Ex. 65 at *255. Karmazin spoke about the equity stake that EchoStar could acquire in the transaction and in detail to the directors about the status of negotiations with EchoStar. Id. at *255. A reasonable jury could infer that the unattractive areas of Ergen I and difficulties associated with it centered on the 51% equity stake and the Board being removed. In fact, at his deposition, defendant Karmazin admitted that the Ergen I deal probably would have rewarded Sirius XM with synergy opportunities and that there were a number of things that would [have been] attractive with the Ergen deal. P Ex. 104 at 164:14-20. 2. Defendants Fear of the Ergen I Deal and Bias Toward the Malone Offer is Exposed
On February 12, 2009, Defendants fear of the Ergen I deal and its implications was exposed in a Barclays Capital analyst report. On that same day, in the middle of the ongoing and competing negotiations between Sirius XM and Ergen and Sirius XM and Malone, Sirius XMs [now former] Senior Vice President of Investor Relations Paul Blalock forwarded the analyst
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report directly to Karmazin and several other Sirius XM executives. In the report, analyst Vijay Jayant, stated that Sirius XMs board would likely be displaced if Ergen took over, given Ergens inclination for control. P Ex. 74 at *977 (emphasis added). Jayant also stated that Liberty[s] involvement is more likely an effort by Sirius XM to attract a competing bidder. Id. Karmazins focus on the analyst report could persuade a jury that the Boards true motivations in discouraging a bid from Ergen lay in preserving their Board seats and positions. In this regard, the Barclays Capital report was merely stating what was already obvious to the industry: many financial restructurings require (or result in) a change in management. D Ex. 169 13. Indeed, the Barclays Credit report referenced the strained relationship between Karmazin and Ergen. P Ex. 74 at *980-981; P Ex. 75 at *340. 24 Karmazins personal feud with Ergen evidently was resurfacing now, five years later, with Sirius XM shareholders paying the price for Karmazin to stay at the helm. Other national press recognized that Ergen wanted to fire [Karmazin] if he was the successful bidder. Andrew Ross Sorkin of The New York Times Dealbook in a February 16, 2009 article described the Liberty deal as one that would save [Karmazins] job. P Ex. 78 at *645. Sorkin described the negotiations between Malone and Karmazin as secret and [f]or Mr. Karmazin, the options were Malone or bust, one person involved said. Id. at *646. (emphasis added). The Delaware Chancery Court has specifically labeled such a tilted playing field a violation of fiduciary duty under Revlon. In re Toys R Us, Inc. Sholder Litig., 877 A.2d 975, 1000-01 (Del. Ch. 2005) (Revlon breached where there is a selfish or idiosyncratic
24
The report discussed how personal issues between Karmazin and Ergen allegedly began after the bitter 2004 programming negotiation dispute between Viacom (then run by Karmazin) and Ergen over the fees Dish was required to pay to carry Viacom channels. During this dispute, Dish allegedly publicized Karmazins home phone number, encouraging viewers to call him. Id. 35
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desire by the board to tilt the playing field towards a particular bidder for reasons unrelated to the stockholders ability to get top dollar). On February 17, 2009, the Board accepted the Malone Offer. Def. Br. at 12. 3. Defendants Red Herring: Net Operating Loss Tax Savings
Defendants argue that Ergen I was inferior due to the loss of NOL [net operating loss] tax savings. Def. Br. at 26. This rationale is significantly disputed by contemporaneous documents. In e-mails sent to Anwar Zakkour of J.P. Morgan on February 15, 2009, Frear recognized that Sirius XM is trying to structure around [NOL losses] with [Liberty Media] and that he thought Sirius XM would find a way with LM to retain the nols. D Ex. 141 (emphasis added). Karmazin testified that the Board would have been aware of NOLs and we would structure a transaction to preserve the NOLs. P Ex. 104 at 227:13-25. This can-do spirit was noticeably absent from the Boards response to Ergen I. B. Evidence that Defendants Breached their Fiduciary Duties under the Business Judgment Rule by Rejecting Ergen II and III
Not to be outbid, Ergen on February 26, 2009 before the Malone offer could close, countered with a new proposal, Ergen II, involving a $725 million loan at rates ranging from 12.5% to 14% and an equity position of 38% in Sirius XM. D Ex. 155. The day after Ergen II was made, the Board discussed the new offer, concluding that it could reasonably lead to a superior proposal and authorizing management and advisors to engage in a discussion with DISH Network regarding the terms of their proposal. D Ex. 70. Scarcely could this process begin before Ergen, on March 3, 2009, sent an even better proposal to the Board, Ergen III. This proposal contained many of the same favorable terms as the Ergen II proposal including the 38% equity stake but now provided an even more attractive $825 million in financing. D Ex. 154. The Sirius XM Board met again a day later, but instead of giving due consideration to it as is
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their fiduciary duty, agreed to to pursue closing the Liberty Media transactions. This critical decision, one that injured the Company and its shareholders, was made over the course of a single 41 minute telephonic [Board] meeting. D Ex. 71. Importantly, as of March 4, 2009, the Board had not yet closed the Malone Offer, leaving plenty of room for Ergen IIIs superior terms to supplant the Malone Offer. Karmazin admitted as much, testifying that following the third and final proposal from Ergen on March 3, 2009, he believe[d] that there was the ability for the company to get out of the Liberty Media deal. P Ex. 104 at 246:22-247:4. By now, Sirius XM had performed an analysis suggesting that the reworked Ergen deal was, indeed, better than the Malone Offer. P Ex. 80, P Ex. 82, P Ex. 81; D Ex. 169 at Exhibit 5; P 56.1 144. However, the Board finally rejected Ergen II and III. As evidenced by the incredibly brief amount of time spent evaluating the new Ergen III proposal in comparison to the Malone Offer, although Defendants three years later now contend that time was of the essence, a jury could conclude that, in reality, no amount of time would have been enough to cause Defendants to choose any of the superior Ergen proposals over the Malone Offer. This is true despite the fact that the improved Ergen offers did not involve a change in control, that the imminence of a bankruptcy filing had been tolled by the execution of an agreement with Liberty Media (though subject to an out clause), and that work-arounds had been found to any NOL issues that might bedevil any of the competing deals. Defendants are not entitled to protection under the business judgment rule because the evidence indicates they never gave adequate (barely any) consideration to Ergen II and III and they allowed Karmazins personal animosity with Ergen and a desire to retain their positions interfere with their judgment. If this evidence is believed, Defendants would thus have fail[ed] to act in the face of a known duty to act, demonstrating a conscious disregard for [their] duties.
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Walt Disney, 907 A.2d at 755. By rejecting a proposal they knew to be superior to the Malone Offer, Defendants intentionally act[ed] with a purpose other than that of advancing the best interests of the corporation [or] fail[ed] to act in the face of a known duty to act, thereby breaching their fiduciary duties. Walt Disney, 907 A.2d at 755 (emphases added). C. The Company Suffered Damages Arising from the Malone Transaction
A reasonable jury could conclude that the Malone Offer was the only deal Defendants would have ever accepted under the Malone or bust mentality. If so, there is a genuine issue whether Defendants breached their fiduciary duties under both the Revlon standard and the business judgment rule by allowing Karmazins poor personal relationship with Charles Ergen and the likelihood that the Board would be removed if Sirius XM accepted the first Ergen proposal to interfere with their evaluation of all of the Ergen offers. Plaintiff has set forth evidence that Sirius XM shareholders have suffered damages of $22.5 million as a result of the Defendants breach. Declaration of Albert Myers dated Mar. 9, 2012, Exh. 1, 2, 8-9, Ex. 6. V. SUMMARY JUDGMENT MUST BE DENIED WITH RESPECT TO PLAINTIFFS CLAIMS ARISING FROM DEFENDANTS $35 MILLION OPTION GRANT TO KARMAZIN. The evidence establishes that on June 30, 2009, scarcely two months after the Malone Transaction was consummated, the Sirius Board of Directors renewed Karmazins contract and in the process granted him 120 million options to purchase Sirius common stock at 43 cents per share. D 56.1 160. Although Siriuss stock traded at 43 cents at the time of the award, Karmazins options had significant value immediately, given the overall statistical probability that Siriuss common stock would appreciate during the life of the options. P Ex. 106, at 17. By Siriuss own estimate, at the time of the grant, Karmazins options had a fair value of $35,209,400. P 56.1 231. Sirius XMs stock price closed at $2.25 per share on March 8, 2012,
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thus Mr. Karmazin has enjoyed gains of $218,400,000 on these options. The Board also conferred a $7,000,000 bonus on Karmazin, bringing his total compensation for 2009 to $43,466,790. P 56.1 232. Defendants have mustered no argument that they are entitled to summary judgment on Plaintiffs breach of fiduciary claims with respect to the excessive compensation of Karmazin, see generally Def. Br. at 14-29, and they therefore have waived that issue. Motions for summary judgment must state with particularity the grounds for seeking the order, Fed. R. Civ. P. 7(b)(1)(B), and Defendants may not raise this issue for the first time on reply. See supra note 5. Even were Defendants so entitled, a reasonable jury could conclude that in awarding Karmazin such titanic compensationafter nearly bankrupting Sirius XM, convincing shareholders and regulators alike to approve an ill-advised Merger, and then abusing the Companys resulting monopoly power to expose the Company to massive antitrust liabilitiesthe Board of Directors breached its fiduciary duties. Although directors have broad discretion to set compensation, such discretion is not unlimited. Rather, there is an outer limit to the Boards discretion, at which point a decision of the directors on executive compensation is so disproportionately large as to be unconscionable and constitute waste. In re Citigroup Inc. Sholder Deriv. Litig., 964 A.2d 106, 138 (Del. Ch. 2009). In Citigroup, the Board approved a $68 million compensation package to its former CEO despite the fact that he allegedly had been responsible for billions of dollars in losses. See id. The court held that, in these circumstances, the plaintiffs had made out a claim for excessive compensation. See id. Similarly, in In re Walt Disney Co., No. Civ. A. 15452, 2004 WL 2050138 (Del. Ch. Sept. 10, 2004), the Delaware chancery court denied a motion for summary judgment involving compensation of $40 million in cash and three million stock options because
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the defendant had not set forth sufficient evidence that the Board acted in good faith to award the compensation). See id. at *2, *6. Moreover, in determining compensation, directors of a Delaware corporation must act in good faith based on an informed analysis of the facts; they may not take an ostrich-like approach, adopting a we dont care about the risks attitude concerning a material corporate decision such as the renewal of CEO employment on lavish terms. See In re Walt Disney Co. Deriv. Litig., 825 A.2d 275, 288-89 (Del. Ch. 2003). Here, there is evidence from which a jury could conclude that Board members consciously disregarded their duties and the risks involved. The full Board conducted no discussions with Karmazin but relegated this task to the Compensation Committee. The Compensation Committee, while purporting to negotiate directly with Karmazin, did not engage an independent financial consultant to study the terms of any proposals or perform a market check of them, or even to assess their reasonableness. P 56.1 233. Moreover, the only negotiations between the Compensation Committee and Karmazin apparently only involved one director on that committee. P 56.1 233. Karmazin, for his part, because the discussions involved his own compensation, was required to conduct them in an adversarial, arms-length manner. Disney, 825 A.2d at 290. As noted above, there is evidence that any negotiations with Karmazin were merely pro forma. Moreover, MaloneSiriuss anointed white knight and by now a controlling shareholder and a Board memberenthusiastically supported the renewal of Karmazins contract and, having known Karmazin for many years and had interacted with him in dozens of social and professional settings, helped convince the Board to tip the scales yet another time against Sirius XMs best interests. P 56.1 234. CONCLUSION Because substantial factual disputes exist with respect to each of Plaintiffs claims, summary judgment should be denied. 40
Filed 04/18/12 Page 49 of 50
Dated:
March 9, 2012
Respectfully submitted, KAHN SWICK & FOTI, LLC

~
By: r Lewis S. Kalu (admitted pro hac vice) Albert M. Myers Melinda A. Nicholson Cecilia E. Rutherford Clu'istopher W. Kaul (admitted pro hac vice) 206 Covington Street Madisonville, LA 70447 Telephone: (504) 455-1400 Facsimile: (504) 455-1498 SPECTOR ROSEMAN KODROFF & WILLIS, P.C. Robert M. Roseman Andrew D. Abramowitz (admitted pro hac vice) Daniel J. Mirarchi (admitted pro hac vice) 1818 Market Street, Suite 2500 Philadelphia, PA 19103 Telephone: 215.496.0300 Facsimile: 215.496.6611
~L
ftk&
Attorneys for Plaintiff
41
Filed 04/18/12 Page 50 of 50
Dated: March 9,2012 Corrected: April 18, 2012 Respectfully submitted, KAHN)jJWI9J<: & FOTI, LLC
By: LeJis S. Kahn (admitted pro hac vice) AlbertM. Myers Melinda A. Nicholson Cecilia E. Rutherford Christopher W. Kaul (admitted pro hac vice) 206 Covington Street Madisonville, LA 70447 Telephone: (504) 455-1400 Facsimile: (504) 455-1498
/1/J/VUf b0J-r----
SPECTOR ROSEMAN KODRQFF & WILLIS, P.C. Robert M. Roseman Andrew D. Abramowitz (admitted pro hac vice) Daniel J. Mirarchi (admitted pro hac vice) 1818 Market Street, Suite 2500 Philadelphia, PA 19103 Telephone: 215.496.0300 Facsimile: 215.496.6611
Attorneys for Plaintiff
41

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Case 1:11-cv-02943-JSR Document 53

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Attorneys for Plaintiff Robert Michael Shenk

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Breach of the Delaware Duty of Full Disclosure to Shareholders ........................ 19

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See supra n. 11. 15

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