In October 2010, AT&T transferred all of the assets and liabilities of its cellular telephone service partnership in Salem, Oregon, into a newly formed affiliate of AT&T. This dissolved the existing partnership, and cashed out the minority partners at a price determined by a valuation firm retained by AT&T.
The partnership, and a number of other similar partnerships, were created in the 1980s as a result of Federal Communications Commission lotteries that awarded the rights to construct telephone networks in specific geographic areas along with the right to provide continuing cellular telephone service to those areas. By 2007, AT&T, the majority partner in many of these partnerships across the country, began exploring the best way to eliminate the minority partners. AT&T had (accurately) predicted that revenue for cellular communications and data services was about to grow significantly, and that buying out minority partners at that time would be cheaper than buying them out down the road.
In 2010, AT&T began a series of “freeze-out” transactions intended to eliminate the minority partners in the existing general partnerships (the Freeze-Out). The Freeze-Out was purportedly for administrative savings purposes. AT&T hired PricewaterhouseCoopers LLP (PwC) to conduct a valuation in advance of the Freeze-Out. The minority partners were given an option to accept an offer from AT&T at a five percent premium to the PwC valuation, or they would be frozen out at the value set by PwC.
A majority of the minority partners voted against the Freeze-Out offer. In late 2011, the former minority partners filed lawsuits alleging that AT&T breached the partnership agreement, and breached its fiduciary duties by conducting the Freeze-Out through an unfair process and at an unfair price.
Numerous cases were filed challenging substantially similar transactions across the country. The Salem, Oregon partnership case filed in the Chancery Court was coordinated, but not formally consolidated, with the other cases, and served as the first bellwether trial. The parties spent eight years in contentious discovery. The case went to trial in December 2020. The court issued a first decision in September 2021, addressing the plaintiffs’ breach of partnership agreement claims. A second decision, released in March 2022, addressed the remaining breach of fiduciary duty claims.
The court found that AT&T breached its duty of loyalty by engaging in an unfair and self-interested transaction process at the expense of the minority partners. The court applied the entire fairness standard because of AT&T’s position on both sides of the transaction and found that the transaction did not satisfy that test because AT&T had not carried its burden to prove either fair dealing or fair price.
With respect to fair dealing, the court took issue with the timing, negotiation, and structure of the transaction process, as well as AT&T’s longstanding relationship with the financial advisor hired to do the valuation.
- Timing: The court found that AT&T timed the Freeze-Out to take advantage of the data revolution, rejecting AT&T’s attempts to distinguish 2007 internal discussions from the actual transactions in 2011.
- Negotiation and structure: The court noted the lack of negotiation with the minority partners and took issue with what it views as a coercive deal structure, noting that AT&T created a two-step process that put unfair pressure on minority partners to accept the front-end price in order to avoid being inevitably cashed out at a lower value.
- Financial advisor: The court found that AT&T’s prior relationship with PwC, and the parties’ interactions throughout the valuation, cut against AT&T’s attempt to prove fair dealing.
Regarding fair price, the court found that AT&T’s expert used unreliable valuation methods and that documents showed that AT&T believed the partnership was worth more than the PwC valuation.
Because AT&T did not show fair price or fair dealing, as required by the entire fairness test, the court held that AT&T breached its duty of loyalty. The court went on to explain that it had the power to “fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages.” To that effect, the court sought to determine the value of what the minority partner plaintiffs had, before the Freeze-Out, based on the operative reality of the partnership at the time of the transaction. The court conducted its own discounted cash flow analysis, selecting what it considered to be reasonable inputs, but giving the plaintiffs the benefit of the doubt.
The court concluded that the partnership’s actual fair valuation was US$714 million, rather than AT&T’s valuation of US$219 million. The minority partners were thus entitled to US$13.4 million, rather than the US$4.1 million they had received. Damages therefore came to a total of US$9.3 million.
Authored by Ryan M. Philp, Jon M. Talotta, Allison M. Wuertz, and Elizabeth Cochrane.
