Saturday, August 11, 2018
As many readers are likely aware, the proposed acquisition of Tribune Media Company by Sinclair Broadcast Group fell through when the FCC referred the matter to an administrative hearing, thus creating a nearly-insurmountable roadblock to closing. On Thursday, Tribune filed a complaint against Sinclair in Delaware alleging that Sinclair breached the merger agreement by failing to use its best efforts to win regulatory approval. The complaint is an entertaining read and regardless of the outcome, I’m quite certain it will prove to be a vivid classroom example of best efforts clauses in the merger context.
The basic gist of the complaint is that Sinclair agreed to use its best efforts to win regulatory approval, and it was entirely foreseen by the parties that the relevant regulators – the Justice Department and the FCC – would want divestments in 10 specific markets. Nonetheless, Sinclair stonewalled the DOJ (at one point actually telling the Assistant Attorney General “sue me”), and submitted sham divestment plans to the FCC that involved, well:
selling WGN-TV in Chicago to Steven Fader, a close associate of [Sinclair Executive Chair David] Smith’s in a car dealership business who had no experience in broadcasting. Sinclair also proposed the sale of WPIX, a New York station, to Cunningham Broadcasting Corporation, a company that owns numerous television stations that are operated by Sinclair employees under joint sales and shared services agreements, has tens of millions of dollars in debt guaranteed by Sinclair, and had been controlled by the estate of Smith’s late mother until January 2018.
…When Sinclair’s applications were subject to public comment, opponents of the divestitures revealed facts that Sinclair had failed to disclose to the FCC …. For example, Sinclair had not told the FCC, in its applications, that Smith owned the controlling interest in Fader’s car dealership company, and that Cunningham’s controlling shares had been sold at a suspiciously low price only months earlier to a Sinclair associate with re-purchase options held by Smith’s family members.
All of which, predictably, submarined the merger and breached Sinclair’s obligations to Tribune.
Now, I have no idea what exactly happened, but I can imagine a cynical story. The cynical story goes something like, Sinclair is a conservative media organization and the merger was favored by Trump. The FCC’s Chair, Ajit Pai, up until now had bent over backwards to accommodate Sinclair, up to and including loosening regulations that allowed the merger to proceed. (Currently, Pai is under investigation by the FCC’s inspector general to determine if these regulatory maneuvers were impermissibly timed to benefit Sinclair). As a result – and knowing that the Trump administration is not renowned for its religious devotion to the minutiae of regulatory procedure – when Sinclair signed the merger agreement, it reasonably believed that its best efforts would not in fact, require it to divest anything (an expectation that may have gotten support from past practice), and was completely blindsided when matters went the other way (as was, apparently, Washington). Certainly, there have been reasonable grounds to believe that this administration occasionally intrudes upon agency decisionmaking.
Either way, if Sinclair were to make an argument along these lines – not that I expect it to, this is a thought experiment – how should the contract itself be interpreted?
Essentially, this is the conundrum that Delaware Chief Justice Leo Strine anticipated when he spoke earlier this year at the Tulane Corporate Law Institute. As I wrote at the time:
[R]eferencing the then-current dispute between Broadcom, Qualcomm, and CFIUS … he explained that judges often have to make difficult decisions about the interpretation of closing conditions that involve regulatory approvals. In the past, judges could at least be confident that, whether you agree with the regulator or not, regulation was not being done “sideways.” If, however, regulation is going to be used for other than its original purposes – such as for protectionist purposes – that will affect how courts address after-the-fact disputes about why deals fell through.
In other words, Delaware judges have to have faith in the legitimacy of the regulatory process in order to evaluate these kinds of disputes; without it, it becomes much harder to interpret “best efforts” clauses that involve entanglement with federal regulators.