Deephaven Risk Arb Trading, Ltd v. Unitedglobalcom, Inc

Facts

D announced a $1 billion rights offering. On the record date of the Rights Offering, D had outstanding 293,107,030 shares of Class A common stock (“Class A” or “Stock”), 8,198,016 shares of Class B common stock (“Class B”) and 303,123,542 shares of Class C common stock (“Class C”). The Class A stock was publicly traded on the NASDAQ National Market and widely held. Liberty Media Corporation owned all of the Class B and Class C shares, giving it approximately 55% of the outstanding common stock and 92% of the cumulative voting power. P began to borrow UGC shares in one of its accounts with the intention of short-selling them to itself in another P account. The result of that type of transaction is that P's purchase and sale prices are identical and no economic interest in D Stock is created. Not all the trades were matched short-sales and purchases. P amassed a substantial net short position across its accounts. P was net short 4,615,071 shares of D. P's Barclays account consistently held a long position in D Stock. P established a position of 2,050,000 shares in the Barclays account, and that figure swelled to a high of 9,338,592 on March 3. P also actively participated in the market for rights, purchasing millions of rights on the open market. The rights were distributed on January 21, 2004, and were freely tradable on the NASDAQ. Each right entitled its holder to a basic subscription privilege and an oversubscription privilege. Each share of Class A stock entitled stockholders to receive .28 rights and approximately 83 million Class A rights were distributed. The basic subscription privilege of each full Class A right allowed the holder to purchase one share of Class A stock at a price of $6.00-a 40% discount to the then-current market price of approximately $10.00. The oversubscription privilege also entitled rights holders who had exercised their basic subscription privilege in full to purchase additional shares of Stock. The number of shares available for oversubscription was to be equal to the number of shares made available by rights holders that failed to exercise their basic subscription privileges. D sought to sell all of the Stock offered in the rights offering either through basic subscriptions or a combination of basic and oversubscriptions. The Rights Offering originally was set to expire on February 6, 2004, but on January 23 D announced that it had extended the expiration date to February 12. Rights holders that submitted notices of guaranteed delivery were to provide the completed subscription certificates by February 18. At the deadline, 63,668,383 shares subscribed pursuant to basic rights and 66,820,883 subscribed pursuant to oversubscription rights. D issued a press release. Based on the preliminary figures, P stood to receive the entire 1 million shares it requested from oversubscription rights. P was surprised by the large number of rights apparently left unexercised and made a series of phone calls to confirm the figures in the press release. The numbers were confirmed. P again called in a few days and things being said did not match. P began recording the phone calls and was told that a lot of the foreign holders couldn't participate due to not providing the appropriate paperwork. A final press release stating that it had received subscriptions for approximately 82 million of the 83 million rights, leaving only about 1 million shares available for oversubscription. This news represented a substantial departure from the figures disclosed in the February 13 press release and later confirmed. The February 20 press release explained the discrepancy by stating that the February 13 press release had excluded shares subscribed pursuant to guaranteed delivery procedures. P called again and recorded the conversations. P received just 34,603 oversubscription shares based on its exercised position of 5,190,700 basic rights and its request for 1,000,000 oversubscription rights. P's counsel wrote to D to express its concern over the sudden change in available rights and to request that all relevant files, documents, and other information be preserved. D denied any “wrongful actions after the delivery deadline.” D then demanded inspection pursuant to 8 Del. C. § 220 The letter requested eleven categories of documents relating to various aspects of the Rights Offering and the manner in which it was executed. P stated four purposes for its demand: (1) to investigate possible corporate wrongdoing or mismanagement, including breaches of fiduciary duty, misuses of corporate assets, misuses of corporate information and/or other wrongdoing in connection with the handling of the Rights Offering; (2) to investigate and assess the veracity and legality of D's public and private disclosures made in connection with the Rights Offering; (3) to determine whether the rights of P and other similarly situated stockholders of D were impermissibly interfered with or denied by D or its agents in connection with the Rights Offering; and (4) to determine whether P and other similarly situated stockholders are in fact entitled to additional oversubscription privileges in connection with the Rights Offering. P eventually filed a Complaint. D moved to dismiss the Complaint under Court of Chancery Rule 12(b)(6), raising issues related to P's technical compliance with § 220, its status as a beneficial holder and the purpose for its demand. On June 15, 2005, D and Liberty Media International consummated a business combination whereby they combined their businesses under a newly formed parent corporation, Liberty Global, Inc. (the “Merger”). Each share of D Stock was converted into the right to receive either $9.58 in cash or .2155 shares of Liberty Global stock. D contends that the Merger mooted this action because P no longer is a stockholder and no longer has a proper purpose to seek inspection.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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