AT&T failed to follow a fair process or pay a fair price when it bought an Oregon-based cellphone partnership in 2010 for $219 million, and owes minority partners who were frozen out $9.3 million in damages plus interest, a Delaware Chancery Court vice chancellor ruled.
In a 135-page opinion Wednesday, Vice Chancellor J. Travis Laster determined the fair value of the Salem Cellular Telephone Co. general partnership was actually $714 million, and said AT&T breached its fiduciary duty of loyalty “by engaging in an unfair and self-interested transaction at the minority partners’ expense.”
“AT&T correctly anticipated that over the next decade, an explosion in data usage would lead to profitable new businesses and products, causing the value of the partnership to increase significantly and enabling the partnership to pay higher distributions,” the vice chancellor wrote. “By acquiring the minority partners’ interests, AT&T sought to capture that value for itself.”
The decision affects minority partners who collectively owned a 1.881% minority stake in the partnership, which held a license to provide cellular services around the Salem, Oregon, area. Defendant AT&T Mobility Wireless Operations Holdings LLC, a subsidiary of AT&T Inc., owned 98.119% of the general partnership and controlled its operations.
The partnership was formed in the 1980s when the Federal Communications Commissions held lotteries for cellphone service areas. Small-area winners were able to assure the value of their holding through partnerships with national carriers, such as was the case for Salem and AT&T. In time, local minority investors saw their stake taken in “freeze-outs,” mergers that gave minority investors no control over absorption into companies like AT&T.
The minority partners sued in October 2011 after they rejected AT&T’s offer to purchase their interests and were frozen out of the partnership, a transaction they allege breached their original partnership agreement.
The suing plaintiffs received about $4.1 million for their interests in the freeze-out, but should have received $13.4 million, the vice chancellor’s ruling said.
“Subtracting the consideration that the plaintiffs received in the freeze-out results in a damages award of $9,311,965,” he wrote. “The plaintiffs are entitled to that amount, plus pre- and post-judgment interest at the legal rate, compounded monthly, from the date of the freeze-out until the date of payment.”
The vice chancellor’s decision Wednesday affects one of a dozen partnerships that AT&T acquired between October 2010 and June 2011 through similar freeze-out transactions that pushed out minority partners. The freeze-outs resulted in 15 civil lawsuits that were coordinated, though not formally consolidated, in 2013 for trial purposes.
It took eight years before the case went to trial, with AT&T “aggressively” resisting discovery, the decision says. “AT&T was the most obstructive litigant that this judge has ever seen, whether in private practice or on the bench,” the vice chancellor wrote.
The Wednesday ruling is one of two “bellwether” decisions that the court issued after a post-trial briefing in the cases, the decision said. The first decision in September 2021 addressed the claims for breach of the partnership agreement. The decision on Wednesday addressed fiduciary duty claims.
The vice chancellor found evidence of unfair dealing in the way AT&T timed and structured the freeze-out.
AT&T timed the freeze-out to eliminate minority partners before the data revolution would increase the value of its wireless business, the ruling says.
AT&T realized as early as 2007 that it would save administrative expenses and gain tax benefits by eliminating minority partners, the ruling says. When planning the freeze-out, AT&T focused on the partnerships because they were “low-hanging fruit” and “minority investors could be eliminated unilaterally,” the decision says.
Leading up to the transaction, AT&T didn’t negotiate with minority partners and kept them “in the dark,” the decision said. Then AT&T gave minority partners a choice between giving up their interest at a price that was 5% higher than a financial adviser’s valuation, or being frozen out at the valuation price.
“AT&T thus created a coercive, two-tier offer that pressured the minority to accept the front-end price or else be cashed out at a lower price. A coercive structure is evidence of unfair dealing,” the opinion says.
Despite the unfair structure, a majority of the minority partners (58.33% by number, 61.11% by interest) rejected AT&T’s offer. “That is strong evidence that that offer was unfair, even with the 5% premium,” Vice Chancellor Laster wrote.
The vice chancellor denied the minority partners’ request that AT&T pay for their attorney fees.
AT&T is reviewing the ruling and considering its opinions, a company spokesperson told Law360 Thursday.
Counsel for the minority partners did not respond to requests for comment.
The plaintiffs are represented by Carmella P. Keener of Cooch and Taylor PA, Marcus E. Montejo, Kevin H. Davenport, and John G. Day of Prickett Jones & Elliott PA, Thomas R. Ajamie, David S. Siegel and Ryan van Steenis of Ajamie LLP, and Michael A. Pullara in Houston.
The defendants are represented by Todd C. Schiltz, William M. Connolly, and Zoë K. Wilhelm of Faegre Drinker Biddle & Reath LLP, and Maurice L. Brimmage Jr. and Laura P. Warrick of Akin Gump Strauss Hauer & Feld LLP.
The case is In re Cellular Telephone Partnership Litigation, coordinated case number 6885-VCL, civil actions 6886 and 6908, in the Court of Chancery for the State of Delaware.
–Additional reporting by Jeff Montgomery. Editing by Patrick Reagan.