Court of Chancery Allows for Interim Distribution to Stockholders of Altaba, Inc., with Some Conditions
By Scott E. Waxman and B. Ashby Hardesty, Jr.
In In re Altaba, Inc., C.A. No. 2020-0413-JTL, Vice Chancellor Laster authorized Altaba, Inc. (the “Company”), a company pursuing dissolution under Sections 280 and 281(a) of the Delaware General Corporation Law (the “DGCL”), to make an interim distribution to its stockholders, on the condition that it reserved funds for lawsuits pending in Canada resulting from data breaches that the Company disclosed in 2016 (the “Canadian Actions Claim”). Vice Chancellor Laster also allowed the Company to hold back less than the full amount of security requested by Carsten Rosenow, an individual who filed a breach of privacy lawsuit against the Company (the “Rosenow Claim”).
The Company was formerly known as Yahoo! Inc., and in June 2017, the Company sold its operating business and nearly all of its attendant liabilities to Verizon Communications Inc. (the “Sale”). After the Sale, the Company’s assets consisted primarily of investments, and after a few years of managing those investments, the Company’s board of directors determined that it was in the best interests of the Company and its stockholders to distribute the Company’s net assets directly to them, either through a direct distribution or by monetizing its assets and distributing the proceeds. As such, on April 2, 2019, the Board approved a Plan of Complete Liquidation and Dissolution (the “Plan of Dissolution”), and on October 4, 2019, the Company filed a certificate of dissolution with the Delaware Secretary of State. Since then, the Company has operated in accordance with the Plan of Dissolution.
On October 4, 2019, the Company mailed notices to more than 400 potential creditors to notify them of the Company’s dissolution and the deadline to assert a claim, and on May 28, 2020, the Company filed a petition seeking judicial determinations under Section 280. As of the date of the filing of the petition, the Company had received correspondence from 68 claimants.
The Company then moved to make an interim distribution to stockholders. To establish the amount of funds available for distribution, the Company either satisfied the claims it received or agreed to retain the full amount of security that the claimants requested. However, there were two claims for which the Company did not agree to hold back the full amount of security requested–the Canadian Actions Claim and the Rosenow Claim–and through its motion to the court, the Company sought to make an interim distribution based on its proposed reserves for these claims and its proposed reserve for unknown claims.
In determining whether to authorize the interim distributions requested by the Company, Vice Chancellor Laster acknowledged that while Sections 280 and 281(a) of the DGCL do not contemplate interim distributions, Delaware law has recognized that an interim distribution can be warranted if the grounds for doing so are clear. This is because an interim distribution is the equivalent of final relief. As Vice Chancellor Laster explained: “Once assets are distributed, they are no longer available to compensate the Company’s creditors. It is also highly unlikely that any amounts distributed in reliance on a court order could be clawed back, or that the directors who authorized a distribution in reliance on a court order would face liability. A company seeking to make an interim distribution therefore should establish that its proposed reserves are sufficient as a matter of undisputed fact, analogous to a motion for summary judgment.”
With this standard in mind, Vice Chancellor Laster evaluated the Canadian Actions Claim and the Rosenow Claim. With respect to the Canadian Actions Claims, he reasoned that such claims turn on “disputed issues of Canadian law and on developments in the Canadian actions that will unfold” in the future. The Company was, in essence, asking Vice Chancellor Laster to undertake the task of predicting what the Canadian courts might do. Vice Chancellor Laster called such task “both unwarranted and dangerous,” noting that there were “too many disputed facts, too much uncertainty, and too much risk to creditors for the court to address this matter now, particularly when near-term developments in the Canadian actions may clarify matters.” He held that if the Company wished to make an interim distribution to its stockholders, then it must reserve $1.05 billion Canadian for the Canadian Actions Claim.
With respect to the Rosenow Claim, Vice Chancellor Laster noted that the Company proposed to hold back $50,000, and that the buyer of the Company’s operating business agreed to assume the defense of the claim and any responsibility for it. He further noted that if the amount reserved for other claims proves excessive, then the excess could be available for the Rosenow Claim. With that in mind, Vice Chancellor Laster held that the Company made “the strong showing necessary to establish that the amount of security it has proposed is sufficient for purposes of making an interim distribution.”
With this in mind, Vice Chancellor Laster authorized the Company to make an interim distribution, on the condition that it reserved funds for the Canada Actions Claim. He also authorized the Company to make an interim distribution based on its proposed amounts of security for all other claims.