In an opinion in In re Sirius XM Shareholder Litigation, the Delaware Court of Chancery dismissed on grounds of laches a complaint alleging that the board of Sirius XM Radio Inc. (Sirius XM) and its majority stockholder, Liberty Media Corporation (Liberty Media), breached their respective fiduciary duties when Liberty Media acquired a majority stake in Sirius XM. The court held that the plaintiffs' argument that the breaches occurred when Liberty Media made open-market purchases without negotiating a new deal with the board could have been raised years earlier when Sirius XM and Liberty Media entered into an investment agreement that authorized those eventual purchases. In its ruling, the court distinguished its 2009 Landry's decision, which faulted a board for failing to prevent a "creeping takeover," with the circumstances of the case here.

The case revolved around a series of investments that Liberty Media made in Sirius XM to help stabilize Sirius XM's finances. In 2009, Sirius XM's stock was trading at $0.15 per share while it faced a deadline to repay certain outstanding convertible notes, for which it lacked the cash flow to do. To raise funds, Sirius XM entered into an investment agreement with Liberty Media under which Liberty Media provided a $530 million cash infusion to Sirius XM. In return, Liberty Media received preferred stock whose certificates of designation provided for:

For an example of a certificate of designation with these features, see Standard Document, Certificate of Designation (Convertible, Double-dip Participating).

The investment agreement, signed on February 17, 2009, also contained a standstill that prevented Liberty Media from increasing its stake in Sirius XM beyond 49.9% for three years. However, once the standstill expired, the investment agreement provided for the opposite, prohibiting Sirius XM from taking any action, such as implementing a poison pill, to prevent Liberty Media from buying Sirius XM stock in the open market if it chose to do so. Sirius XM announced and described the investment agreement in a Form 8-K, and on March 10, 2009, provided additional disclosures in its annual report on Form 10-K. The 10-K included a risk factor alerting investors that Liberty Media's interests may diverge from Sirius XM's and that Liberty Media had "significant influence" over Sirius XM's affairs. The investment agreement was also attached as an exhibit to the 10-K.

Sirius XM's financial situation gradually improved; by the time the standstill expired, its stock was trading at $2 per share. On March 6, 2012, Liberty Media announced that, pending regulatory approval from the FCC, it would seek to acquire majority control in Sirius XM by purchasing additional stock in the open market and converting its preferred equity stake. The board of Sirius XM, viewing itself as bound by the terms of the investment agreement, did not attempt to block these open-market purchases, whether by opposing Liberty Media's application to the FCC (once the appropriate form of application was made), adopting a pill or other defensive measure, or attempting to invalidate the relevant terms of the investment agreement. On January 17, 2013, Liberty Media announced that it had obtained a majority of the outstanding shares of Sirius XM common stock.

The plaintiffs' consolidated action was originally filed in August 2012 and amended after Liberty Media made its announcement about obtaining a majority of the common shares. The complaint focused on the 2009 time period when the investment agreement was entered into and the 2012 period when Liberty Media began making open-market purchases. The complaint alleged that Liberty Media and the board of Sirius XM each breached their fiduciary duties of loyalty to the unaffiliated stockholders by agreeing to terms that allowed, and then eventually by allowing, a creeping takeover by Liberty Media outside of a negotiated agreement, without payment of a control premium.

The Delaware Court of Chancery dismissed the complaint, holding it time-barred under the equitable doctrine of laches. The court noted that more than three years had passed since the announcement and disclosure of the investment agreement, analogizing the appropriate time to have brought the complaint to the three-year statute of limitations for claims of breach of fiduciary duty. The court explained that the disclosure of the agreement was enough to put the plaintiffs on notice of not only the terms of the agreement, but of the fact that, if Sirius XM's condition improved, open-market purchases would eventually be made after the expiration of the standstill. The plaintiffs therefore could not argue that the underlying breach only began with the open-market purchases in 2012, because those purchases were simply "the manifestation of the bargain struck" in 2009. Consequently, if the plaintiffs ever wanted to argue that the terms of the investment agreement were per se invalid, their opportunity to do so was in 2009 (the court stated pointedly that it is not reaching that issue in this decision).

To attempt to locate a new breach that occurred in 2012, the plaintiffs argued that in spite of the fact that Liberty Media had put $530 million at risk in 2009 by negotiating a deal that forbade it to purchase any more shares for three years, it acquired a new duty of fairness to refrain from acquiring majority control without negotiating a new deal with the Sirius XM board. In support of this theory, the plaintiffs relied on the Delaware Court of Chancery's Landry's decision (Louisiana Municipal Police Employees' Retirement System v. Fertitta, (Del. Ch. July 28, 2009)). In Landry's, the Delaware Court of Chancery held that a board's failure to install a poison pill in the face of an obvious threat of a creeping takeover by a controlling stockholder could support a reasonable inference of a breach of duty of loyalty (see Legal Update, Landry's: Delaware Court of Chancery Denies Motion to Dismiss Claim of Breach of Duty of Loyalty).

The court rejected this theory, distinguishing Landry's on the facts, in addition to holding that this argument could also have been raised in 2009. As the court explained, in Landry's:

On the contrary, the Landry's court held that a board does not have a per se duty to enact specific defensive measures, such as a pill, to block a stockholder's purchase of additional shares. An inference of breach, the Landry's court explained, is only raised if the failure to enact defensive measures, taken together with other suspect conduct, supports a reasonable finding that the board breached its duty of loyalty in permitting the creeping takeover. Yet whereas the Landry's Restaurants board had engaged in "other suspect conduct," including terminating a merger agreement so that the controlling stockholder would avoid paying a reverse break-up fee, no additional suspect conduct by the Sirius XM board or Liberty Media was alleged.

The Sirius XM decision confirms that there are no particular actions that a board must take, as a matter of black-letter law, to prevent creeping takeovers through open-market purchases. Instead, the actions of the board are reviewed as a whole, and when it has a valid reason to fail to implement a pill — such as when it is contractually forbidden from doing so — it will likely avoid a finding of breach of fiduciary duty. Similarly for the investor, the court rejected the idea that stockholders have a standing duty of fairness to refrain from acquiring a majority stake without stopping to negotiate with the board first.

The decision provides comfort to parties and their counsel negotiating deals for last-minute infusions of capital to help stave off bankruptcy. These agreements often have a strongly investor-friendly character, but are justifiable when the investor is assuming risk and the board is facing the demise of the corporation. Although the court did not specifically opine on the legality of the terms of the Sirius XM-Liberty Media agreement that allowed open-market purchases after expiration of the standstill, the decision reads as if the court would have had little trouble upholding those terms.