Gradient OC Master, Ltd. v. NBC Universal, Inc.

OPINION

This dispute involves challenges by holders of two classes of senior preferred stock of ION Media Networks, Inc. (“ION” or the “Company”) to an exchange offer being made to those stockholders as one of several transactions provided for under a Master Transaction Agreement (“MTA”) to restructure the Company’s ownership and capital structure. Defendants are ION, its directors, NBC Universal, Inc. (“NBCU”) and Citadel Investment Group LLC and an affiliate, CIG Media, LLC, (collectively, “CIG”). ION, NBCU and CIG are parties to the MTA. Plaintiffs assert that the exchange offer violates Delaware’s prohibition against coercive or misleading offers to stockholders and also improperly extracts value from minority shareholders for the benefit of a majority or controlling shareholder, namely, NBCU, CIG or both of them. The plaintiffs’ complaints aver claims directly on behalf of themselves, individually and as representatives of the class of similarly situated preferred stockholders, and derivatively on behalf of ION against Defendants for allegedly willful and bad faith breaches of their fiduciary duties to ION and plaintiffs, and seek injunctive and other relief. The matter is presently before the Court on plaintiffs’ motions for a preliminary injunction.

The challenged exchange offer is scheduled to close at 12:01 a.m. on July 11, 2007. After expedited discovery and briefing, the Court held a hearing on the motion for preliminary injunction on July 6, 2007. For the reasons stated below, I conclude that plaintiffs have not shown a reasonable likelihood of success on the merits as to their claims for wrongful coercion based on, among other things, the elevation feature of the exchange offer, under which if less than 90% of the senior preferred shares participate in the exchange, preferred stock of NBCU and CIG junior to plaintiffs’ stock will be elevated to subordinated debt with priority over plaintiffs’ preferred shares. Plaintiffs also have not demonstrated a reasonable likelihood of success on their related claims of inadequate disclosure and improper extraction of value by a controlling stockholder. Further, I am not convinced that plaintiffs *109 will suffer irreparable harm if the exchange offer is not preliminarily enjoined until this matter can be tried on the merits. Thus, although the balance of the hardships to the parties depending on whether an injunction issues may weakly favor plaintiffs, I have determined that considering all three factors relevant to deciding whether a preliminary injunction is warranted, plaintiffs have failed to show that such extraordinary relief is appropriate in these circumstances.

I. FACTS AND PROCEDURAL HISTORY

A. Background

Representatives of two classes of ION preferred stock (collectively, the “Senior Preferred Stock” or “Senior Preferred Stockholders”) have brought two separate actions in this Court challenging the pending exchange offer, C.A. Nos. 3021-VCP and 3043-VCP. To date, the actions have not been consolidated, but the parties in both actions have agreed to present their motions for preliminary injunction on a coordinated basis in C.A. No. 3021. 1

Plaintiffs in C.A. No. 3021 are a group of investors holding 1314% Cumulative Junior Exchangeable Preferred Stock, currently accruing dividends at 14/4% (“14)4% Preferred Stock” or “Preferred Stock”) of ION. Plaintiffs appear to be six different hedge funds. Three of the Plaintiffs purchased their shares after ION entered into the MTA on May 3, 2007.

ION, a Delaware corporation, is a network television broadcasting company that owns the largest television station group in the United States, operating approximately 60 television stations. The company, renamed in February, 2006 from Paxson Communications, Inc., reaches around 90 million households through reruns of shows such as “Mama’s Family” and “The Wonder Years.” In 1999, ION and NBCU’s predecessor entered into an agreement whereby NBCU invested approximately $415 million in ION in exchange for 41,500 shares of 8% Series B convertible exchangeable preferred stock, warrants to purchase up to a total of over 32 million shares of Class A common stock, and registration rights under the Securities Act. 2

On or around November 7, 2005, ION and NBCU entered into additional agreements to restructure NBCU’s investment in the Company and to settle certain litigation that had arisen between them relating to the NBCU preferred shares. As part of the settlement, NBCU acquired contractual provisions related to its preferred shares that required ION to obtain NBCU’s consent before engaging in, among other things, certain financial transactions. NBCU also received an 18- *110 month transferable call option from Lowell Paxson and certain affiliates controlled by him that, if exercised, would trigger a sale of the rest of the Company and give NBCU a controlling block of Class A and B common stock and the right to designate a nominee to purchase those shares. 3 The call option was set to expire on May 6, 2007.

At some point, ION and NBCU determined that certain rules promulgated by the Federal Communications Commission (“FCC”) would prohibit NBCU from exercising the call right, leading NBCU to seek a third party to which it could transfer the call right before it expired. 4 In the latter part of 2006, NBCU and Citadel engaged in discussions and negotiations with each other with a view toward proposing a comprehensive recapitalization transaction to ION, including a transfer of NBCU’s call option to CIG. From NBCU’s perspective, in addition to facilitating a transfer of the option, “a fundamental component of the transaction that ultimately was proposed with Citadel was to reduce the fixed claims or functional leverage on [ION’s] balance sheet.” 5

B. ION’s Board of Directors Explores Restructuring

ION had a complex capital structure and was considered overly leveraged. As of March 31, 2007, the Company had $1.1 billion in senior secured debt; the 14/4% Preferred Stock, with an aggregate liquidation preference and accumulated dividends of $640 million; a series of 9%% Series A Convertible Preferred Stock (the “9%% Preferred Stock”) with an aggregate liquidation preference and accumulated dividends of $175 million; and a series of 11% Series B Convertible Exchangeable Preferred Stock (the “Series B Preferred Stock”) with an aggregate liquidation preference and accumulated dividends of $706 million. 6

Under a previous refinancing of senior debt obligations in December, 2005, the Company was permitted to incur up to approximately $650 million of subordinated debt that could be available for use in a future recapitalization. In April, 2006, the Company retained UBS Securities LLC (“UBS”) to advise it on financial strategies. In June, 2006, ION’s Board created a special committee of independent directors to explore the Company’s strategic options (the “Special Committee”). The following month, the Special Committee retained Lazard Freres & Co. LLC (“Lazard”) as its financial advisor and Pillsbury Winthrop as its legal advisor. In the fall of 2006, ION’s management publicly announced that the Company’s highly leveraged position was hampering their ability to progress and the Board needed to modify its capital structure to improve liquidity and reduce obligations. 7

The Senior Preferred Stock had mandatory redemption dates in November and December 2006. ION did not redeem the shares. As a result, the two classes of Senior Preferred Stock, including the 14% % Preferred Stock, each elected two directors to the Board. They took office in April 2006. 8

*111 C. ION’s Negotiations with NBCU and Citadel 9

On January 17, 2007, Citadel and NBCU, substantial holders of ION preferred stock, jointly proposed an equity restructuring transaction to ION (the “CIG/NBCU Proposal”). 10 The proposal contemplated a tender offer by the Company for the Class A common stock at a price in the range of $1.41 per share in cash. The proposal also called for an exchange offer, which provided holders of the 14)4% Preferred Stock the opportunity to exchange their securities for subordinated debt at a ratio of 70% of the face amount. If more than 90% of Senior Preferred Stock 11 participated in the exchange offer, CIG and NBCU would remain at the bottom of the capital structure and receive preferred stock that was man-datorily convertible into common stock. 12 The proposal also included a so-called Contingent Exchange (“Contingent Exchange” or “Elevation”) that would permit CIG and NBCU to exchange up to $470 million of their preferred stock for subordinated debt if less than 90% of Senior Preferred Stock participated in the exchange offer. As participation in the exchange offer increased, CIG and NBCU would exchange a proportionally decreasing amount of preferred stock. According to Citadel and NBCU, their proposal would reduce fixed claims in the capital structure by approximately $300 million and recurring fixed charges by approximately $50 million. 13

After evaluating Citadel’s and NBCU’s proposal, ION’s Special Committee and Board concluded that the proposal was unacceptable without significant improvements. Between January and the end of April, 2007, the Special Committee and its advisors had numerous discussions with representatives of NBCU and Citadel about their proposal. After extensive negotiations, and a couple of revised proposals, Citadel and NBCU had made the following concessions, many of which benefited Senior Preferred Stockholders: 14

• CIG, rather than ION, would make the tender offer for non-Paxson common stock.

• CIG, which held significant amounts of 14)4% and 9%% Preferred Stock, agreed to participate fully in the Exchange Offer on the same terms offered to the other Preferred Stockholders, for an aggregate principal amount of $66.8 million of subordinated debt.

• CIG agreed to invest $100 million in ION.

• The initial recovery for the holders of 14)4% Preferred Stock was raised from 70% to 80% of the face amount.

• To ensure that the securities offered in the exchange would trade at par, the coupon on the notes being offered was increased from 7% to 11%.

• CIG committed to additional funding of up to $15 million to cover transaction costs, and CIG and NBCU *112 agreed to cover their own fees for legal counsel and financial advisors.

D. ION Rejects Other Competing Proposals

Between January and May 2007, the Special Committee considered at least nine different proposals submitted by NBCU and Citadel, an anonymous third party, and an Ad Hoc Committee representing holders of the 14/4% Preferred Stock. For example, on February 16, 2007, certain Plaintiffs and other holders of 1414% Preferred Stock proposed a recapitalization of ION that provided $100 million in new money to the Company. Although ION did not accept this proposal, it evidently prompted NBCU and Citadel to incorporate the $100 million component as part of their offer. In April 2007, the anonymous third party made a proposal to purchase ION through a $2.13 billion all-cash bid.

The Special Committee perceived significant execution risks with the alternative proposals made by the Ad Hoc Committee and the third party. These include the possible need for a voluntary bankruptcy filing, which the Committee did not favor, and the possible expiration of the call option and its potentially adverse effect on ION’s bargaining position as to the tender offer price for the common. 15 In addition, the Special Committee’s investment advis- or, Lazard, found it very difficult to come up with a transaction that did not require NBCU’s consent, based on the contract rights NBCU obtained in the November 2005 settlement. 16

In part due to the fact that the call option was scheduled to expire on May 6, 2007, the Special Committee unanimously recommended on May 1, 2007 that the Board agree to the latest proposal made by Citadel and NBCÜ. The ION Board approved the transaction on May 3, 2007.

E. The Master Transaction Agreement

ION, NBCU, and CIG executed the MTA on or about May 3, 2007. The MTA summarizes the Company’s agreement to an approach that would take ION private under the control of CIG or NBCU. The MTA contemplates several transactions. In general terms, NBCU assigns the call option to CIG and CIG exercises the option. A new call option is then issued from CIG to an affiliate of NBCU. 17 CIG lends $100 million to ION by purchasing newly issued notes and promises to lend up to an additional $15 million to cover the expenses relating to the transaction. 18 CIG tenders for the remaining shares of Class A common stock of ION at approximately $1.46 per share (the “Tender Offer”). The MTA also requires ION to commence “[a]s soon as reasonably practicable” an Exchange Offer and Consent Solicitation (“Exchange Offer” or “Exchange”) for exchanges of Senior Preferred Stock. 19 Following the closing of the call option, ION, which is expected to be substantially or completely controlled by CIG, would institute a reverse stock split. 20 Thereafter, an NBCU affiliate could exercise the call option to acquire majority control of CIG. Ultimately, the MTA preserves NBCU’s ability to gain control of the Company *113 through a new stockholder agreement between NBCU and CIG.

On May 4, 2007, CIG commenced the Tender Offer for the ION Class A common stock in accordance with the MTA. As of June 4, 2007, approximately 40.6 million shares, or 62.1% of the Class A common stock, had been tendered to CIG. By June 15, that number had increased to over 88%. 21

F. The Exchange Offer and Consent Solicitation of the 1414% Preferred Shares

ION commenced the Exchange Offer and Consent Solicitation on June 8, 2007. In the Exchange Offer, ION is offering to exchange for its outstanding 14/4% Preferred Stock newly-issued 11% Series A Mandatorily Convertible Senior Subordinated Notes due 2013 and, depending upon participation levels in the Exchange Offer, either newly issued 12% Series A-l Man-datorily Convertible Preferred Stock or 12% Series B Mandatorily Convertible Preferred Stock. 22 ION has conditioned the Exchange Offer upon the percentage of shares tendered. If more than 50% of the shares are tendered, each tendered share of 14%% Preferred Stock will receive $7,000 principal amount of Series A Notes (subordinated debt) and $1,000 initial liquidation preference of the Series A-l Convertible Preferred Stock, which would rank senior to any unexchanged Preferred Stock. If holders of 50% or less of the Senior Preferred Stock tender in the Exchange Offer, tendering holders will receive $7,500 principal amount of Series A Notes and $500 initial liquidation preference of Series B Convertible Preferred Stock, which would rank junior to any unexchanged Preferred Stock (“Minority Exchange Consideration”). The 14y4% holders who choose to participate in the Exchange also consent to, among other things, amending the existing certificate of designations to eliminate restrictive covenants, such as ION’s obligation to repurchase the 14%% Preferred Stock upon a change of control, and all voting rights provided for in the original certificates.

After the Exchange Offer commenced, ION announced on June 26, 2007, that the Company had extended the Exchange Offer generally for one day until 12:01 a.m. on July 11, 2007, and for ten business days if holders are to receive the Minority Exchange Consideration. 23 If, during that time, a majority of shares of the Senior Preferred Stock have been tendered, holders will still receive the Minority Exchange Consideration, but have to give the covenant consents.

G. Procedural History

Plaintiffs, led by Gradient OC Master, Ltd., filed this action on June 13, 2007. That same day, Plaintiffs moved for a preliminary injunction and for expedited treatment of the case. Defendants opposed both motions. After hearing argument on June 20, I granted Plaintiffs’ motion to expedite and denied, as moot, a limited request for a temporary restraining order. Plaintiffs amended their complaint on June 22, 2007.

*114 The amended complaint (“Complaint”) asserts nine causes of action. The First through Fourth and Sixth through Ninth Causes of Action assert claims for breach of fiduciary duty or aiding and abetting such breaches. 24 By way of relief for those claims, Plaintiffs seek injunctive and declaratory relief, rescission and rescissory damages. The Fifth Cause of Action involves a direct, individual and class, claim by Plaintiffs for damages based on an alleged breach of contract. Plaintiffs base their motion for a preliminary injunction solely on the breach of fiduciary duty claims. 25

After expedited briefing and discovery, the Court heard oral argument on Plaintiffs’ motion for a preliminary injunction on July 6, 2007. Because the Exchange Offer was set to close just after midnight on July 10, I informed the parties of my ruling at the close of business on July 10, 2007. This opinion provides the detailed reasons for my ruling.

H. Parties’ Contentions

In their motion for a preliminary injunction, Plaintiffs largely seek to enjoin the allegedly coercive aspects of the Exchange Offer based on equitable grounds rooted in Delaware law that make it actionable to “wrongfully coerce” shareholders into making investment decisions. Plaintiffs first argue that the Contingent Exchange aspect of the Exchange Offer is actionably coercive because it impermissibly induces the Preferred Stockholders to participate in the Exchange Offer, by “linking” to a decision not to participate the Elevation of junior preferred stock of NBCU and CIG to debt with priority over the Senior Preferred Stock, if less than 90% of the 14/4% Preferred Stock accept the Exchange Offer. Plaintiffs also argue that the Exchange Offer is actionably coercive because it calls for the removal of certain protective covenants from Senior Preferred Shares that are not tendered in the event that a majority (but less than 90%) of the shares decide to participate in the Exchange Offer. Plaintiffs further contend that the ION Board failed to disclose material information in their Exchange Offer and Consent Solicitation, such as their inability to obtain a fairness opinion for the Exchange Offer from three separate investment banks.

In addition, Plaintiffs contend that NBCU, CIG or the two of them together, are controlling shareholders under the Supreme Court’s Tri-Star Pictures, 26 Gentile, 27 and Gatz 28 line of cases. That is, Plaintiffs accuse NBCU and CIG of improperly extracting value from minority shareholders for the purpose of enriching themselves. Plaintiffs allege that Defendants have diluted the value of the Senior Preferred Stock and claim that, in the absence of a legitimate business purpose, the challenged Elevation is actionable.

Defendants deny that the Contingent Exchange is actionably coercive because Plaintiffs are able to make an economic choice on the merits of the transaction. *115 Merely because Plaintiffs might not prefer or like either of their choices does not create coercion. Defendants also contend Plaintiffs have failed to identify any material deficiency in the Solicitation for the Exchange Offer. Moreover, as shareholders owning less than 50% of ION, NBCU and CIG each deny being a controlling shareholder within the meaning of TriStar Pictures and similar cases.

II. ANALYSIS

A. Preliminary Injunction Standard

Plaintiffs seek a preliminary injunction against the closing of the Exchange Offer, set to expire at 12:01 a.m., Wednesday, July 11, 2007. In order to obtain preliminary injunctive relief, the moving party must demonstrate that: 1) there is a reasonable probability that they will succeed on the merits of their claims; 2) they will suffer irreparable harm if injunctive relief is not granted; and 3) the harm that would result if an injunction does not issue outweighs the harm that would befall the opposing party if the injunction is issued. 29

B. Likelihood of Success on the Merits

The first prong of a preliminary injunction analysis requires that I look to the merits of Plaintiffs’ claims. In support of their motion for a preliminary injunction, Plaintiffs argue that the Exchange Offer is coercive with respect to its terms and the accompanying disclosures in the June 8 Solicitation. In particular, Plaintiffs argue that under Section 5.04(a) of the MTA, entitled “Contingent Exchange,” if, at the close of the Exchange Offer, tendered shares are between 50 and 90 percent (ie., sufficient to be a majority of the shares but not for the Company to employ a short-form merger), the non-participating holders are required to give up the protective covenants present in the current Certificate of Designations (“CD”) for the 14)4 % Preferred Shares. Among the protections that would be eliminated are the requirement that ION redeem the shares upon a change of control and the voting rights to appoint Board directors triggered by, among other things, a failure to redeem the shares. Additionally, the Contingent Exchange triggers the Elevation of up to $470.6 million of NBCU and CIG holdings from junior preferred shares under the 14)4% Preferred Stock to subordinated debt above that stock in the Company’s capital structure. The number of junior preferred shares so elevated is inversely proportional to the number of shares of 14)4% Preferred Stock tendered into the Exchange.

If tendered shares fall below 50% (e.g., zero to minimal participation), closer to $470.6 million of NBCU and CIG holdings of junior preferred shares will be elevated to debt. Plaintiffs emphasized that the fairness opinion relied upon by the ION Board as to the MTA transactions in general, given by investment bank Houlihan Lokey Howard & Zukin (“Houlihan”), reports the enterprise value of ION to be between $1.61 to $2.01 billion. Before the Exchange Offer, the Company had $1.13 billion in senior secured debt. Thus, although the 14)4% Preferred Shares are currently within the enterprise value of the Company, the Elevation provided for in the Contingent Exchange would subordinate the 14)4% to such a degree that the exchange of NBCU and CIG shares would *116 completely or substantially push the 14%% shareholders “out of the money.” 30 Plaintiffs characterize their situation as one of a “prisoner’s dilemma” of being forced to make a choice without knowing what choice is made by others where each others’ choice directly affects the potential outcomes. Specifically, they contend:

Here, Plaintiffs must choose between: (a) refusing to exchange and facing the devaluation caused by the NBC/CIG Elevation, or (b) participating in the Exchange and accepting its punitive redistribution of debt and stripped down pre-ferreds, in the hope that over 90 percent of holders will also participate. Of course, this dilemma is increased exponentially by the possibility that 90 percent will not be reached, but more than 50 percent will. In such a case, nonparticipants face the doubly punitive result of: (a) devaluation through the NBC/CIG Elevation, and (b) the stripping of all material rights from the Certificate governing their holdings. 31

In that regard, Plaintiffs argue that they are prevented from choosing the status quo and must select between two punishments in terms of loss of value in their securities.

Defendants respond that claims of preferred shareholders are almost exclusively based in contract. According to Defendants, therefore, any cognizable claims Plaintiffs might have stem from the contract rights they have under their CD, and not from any fiduciary duty owed to them by a Defendant. Moreover, Defendants argue that the sole remedy under the CD for any and all of the alleged violations presented in this case is the ability to elect two directors to ION’s Board. Thus, Defendants urge the Court to deny a preliminary injunction because the CD effectively precludes Plaintiffs from obtaining such relief.

Defendants also dispute Plaintiffs’ claim of being “pushed out of the money” because Plaintiffs still retain the ability to make a purely economic decision. Although the circumstances may make one choice more compelling than the other from a specific Plaintiffs point of view, Defendants argue that influencing a transaction so that one option is more attractive than another hardly makes such a transaction actionably coercive or “coercive in a legal sense.” Defendants point to months of deliberations by the Special Committee of ION, with extensive advice from financial and legal advisors, before they recommended the MTA, a disinterested board who voted in favor of the overall series of transactions contemplated by the MTA, and a fairness opinion provided by Houli-han relating to the transaction as a whole to underscore the overall benefit provided to ION and all its shareholders, including common shareholders.

1. Applicable legal principles to coercion claims

As a general rule, preferred shareholders’ rights are primarily contractual in nature. 32 Therefore, those rights are governed broadly by the express provisions of the company’s certificate of incorporation 33 and specifically through the *117 document designating the rights, preferences, etc. of their special stock. 34 Where, however, a right asserted is not to a preference but rather a right shared equally with the common, the existence of such right and the scope of the correlative duty may be measured by equitable as well as legal standards. 35

In that regard, this Court has recognized that preferred shareholders share the same right as common shareholders to be free from wrongful coercion in a stockholder vote. 36 In so holding, Delaware courts have determined that “the standard applicable to the [preferred shareholder’s] claim of inequitable coercion is whether the defendants have taken actions that operate inequitably to induce the preferred shareholders to tender their shares for reasons unrelated to the economic merit of the offer.” 37 In other words, the ordinary definition of “coercion,” something akin to intentionally persuading someone to prefer one option over another is not the same as saying that the persuasion would so impair the person’s ability to choose as to be legally actionable. 38 The challenged conduct must be “wrongfully” or “actionably” coercive for a legal remedy to ensue. 39 Thus, an action is not coercive unless a shareholder is wrongfully induced to make a decision for reasons unrelated to merit. 40 On the other hand, an action is “actionably coercive” if, in the context of a tender offer, it “threatens to extinguish or dilute a percentage ownership interest in relation to the interests of other stockholders.” 41

In In re General Motors Class H Shareholders Litigation, 42 Vice Chancellor Strine clarified the distinction between coercion (i.e. circumstances that lead to a preference in voting but are not legally actionable) and “wrongful” or “actionable” coercion. In that case, GM issued GMH stock, which represented rights in equity and assets in the parent company, GM, but which tied dividends to the financial performance of Hughes Electronics, a GM subsidiary that consisted of Hughes Defense, Hughes Telecom, and Delco. In an effort to recapitalize, the GM board proposed and approved a spin off of Hughes Defense to Raytheon and, in doing so, transferred Delco into the parent GM. The transactions also included a $1 billion infusion of money by Raytheon into the re *118 maining portion of Hughes Electronics, Telecom. Upon approval of-the transaction by shareholders, GMH shareholders would have economic interests as direct stockholders in Raytheon, as the purchaser of Hughes Defense, through a dividend interest in Hughes Telecom, as the holder of recapitalized GMH shares, and through a tenuous economic interest in Delco, now a division of GM.

The recapitalization efforts needed majority approval from both the GM and the GMH shareholders. As part of the consent process, GM informed GMH holders that a vote to approve the transactions would have the effect of waiving any possible application of certain covenant amendments contemplating GMH remedies upon a recapitalization. The solicitation also disclosed that the transactions, as contemplated, were entitled to tax-free treatment but that, because of recently enacted federal tax legislation that would become effective after the closing of the transactions, a future recapitalization involving Hughes Defense, if consummated, would be subject to taxable gains.

The GMH shareholders alleged that they were actionably coerced by having to choose between giving up recapitalization covenants intentionally tied to an affirmative vote or blocking the transactions and squandering potentially enhanced values realized from those transactions. The GMH shareholders also alleged that the board actionably coerced them by disclosing that the Hughes recapitalization would receive favorable tax treatment, but that future transactions might not.

The court found no actionable coercion in the board’s actions regarding the waiver of the recapitalization provision. First, the court noted that neither allegation stated a claim that the coercive actions were “unrelated to the merits of the Hughes Transactions.” 43 As the court quipped, “you can’t have your cake and eat it too”; 44 by alleging coercion, plaintiffs attempted to take the benefit of a company’s recapitalization and, notwithstanding that benefit, insure their position by seeking, in addition, recapitalization covenant protection. However, “the opportunity to make this choice by vote carried with it a concomitant obligation on the part of the voters to accept responsibility for the outcome.” 45

Second, and perhaps more importantly, the court looked at the board’s rationale for relating the covenant stripping to the transactions and determined that the “GMH stockholders had a free choice between maintaining their current status and taking advantage of the new status offered by the Hughes Transactions.” 46 In particular,

*119 The GM Board had no duty to structure the Hughes Transactions so as to trigger the Recap Provision, and thereby avoid asking the GMH stockholders to choose between the potential for a premium under the Recap Provision and the deal consideration. They were permitted to structure the deal as they did so long as they did not strong-arm the GMH stockholders into voting for it.

Such strong-arming is absent here. In the event that the Hughes Transactions did not receive GMH stockholder approval, the GMH stockholders would have been in precisely the same position they were in before the vote. 47

A board’s decision to construct a recapitalization without triggering contractual covenants is not, the court concluded, action-ably coercive.

In making that determination, the court in GM focused on the manner in which the board used covenant stripping. In particular, the court held that a board’s choices to formulate a business decision are given deference by the courts unless it impacts unfairly, or “strong-arms” the vote so as to force a shareholder, for reasons outside of the economic merit, to tender into the offer. The court concluded that the board’s use of the covenant stripping did not amount to actionable coercion because the stockholders, if they chose not to tender, would still be in the same position they had been before the vote. 48

“Being in the same position,” however, should not be read literally. The court went on to analyze the tax-treatment disclosure:

However, if the electorate decided to choose the status quo, GM informed them that they should not expect that a future transaction ‘structured in a manner similar to the Hughes Transactions’ could be accomplished in a tax-free manner. This information was material and informed the GMH stockholders of a reality with which GM and they had to contend. 49

A vote, by its nature, forces shareholders to suspend artificially the present circumstances in a snapshot economic situation. It is not, however, the same as suggesting that the economic world itself does not move forward. Keeping the shareholders in the “same” position, then, does not require an “identical” position, economic or otherwise. Instead, a shareholder is ac-tionably coerced when he is forced into “a choice between a new position and a compromised position” for reasons other than those related to the economic merits of the decision. 50

An application of this analysis can be seen in AC Acquisitions. 51 Over the course of several months, shareholders of Anderson, Clayton attempted to bring the *120 company to the bargaining table. Having failed to do so, they formed a new corporation, AC Acquisitions, to make a cash tender offer for any and all shares of Anderson, Clayton at $56 per share. One day later, Anderson, Clayton announced the commencement of a self-tender offer for 65.5% of its outstanding stock at $60 per share cash. The company also announced that, in connection with the closing of its tender offer, the company would sell stock to a newly-formed employee stock ownership plan (“ESOP”) amounting to 25% of all issued and outstanding stock following such sale. AC Acquisitions sought preliminary injunctive relief against the company to, among other things, prohibit it from purchasing any shares pursuant to its self-tender offer. Plaintiffs alleged actionable coercion and cited the timing of the Anderson, Clayton offer and the decision to tender for 65.5% of the outstanding stock as elements of the self-tender reflective of the defendants’ motives to actionably coerce shareholders into taking the company’s offer.

Chancellor Allen remarked that, “if all that defendants have done is to create an option for shareholders, then it can hardly be thought to have breached a duty.” 52 The company, however, artificially manufactured circumstances surrounding the initial shareholder decision under which “no rational shareholder could afford not to tender into the company’s self-tender offer at least if that transaction is viewed in isolation.” 53 The Chancellor explained that:

What is clear [from both parties’ expert testimony on the value of the shares], is that a current shareholder who elects not to tender into the self-tender is very likely, upon consummation of the company transaction, to experience a substantial loss in market value of his holdings. The only way, within the confines of the company transaction, that a shareholder can protect himself from such an immediate financial loss, is to tender into the self-tender so that he receives his pro rata share of the cash distribution that will, in part, cause the expected fall in the market price of the company’s stock. 54

In structuring such an option, the company precluded as a practical matter shareholders from choosing to accept the AC Acquisitions tender offer based on its economic merits. No reasonable investor would be able to choose between two tender offers; instead, and because of the board’s actions, the shareholder effectively was forced to take the corporation’s self-tender regardless of the economic merits of each proposal. Thus, the court held that the company moved the shareholders into a compromised, or actionably coercive, situation.

Other cases discussing coercion versus actionable coercion comport with this concept. A tender offer, for example, that includes a market premium intended to induce share participation, is not action-ably coercive. 55 A tender offer that includes a premium, but limits acceptance to 47% of outstanding shares is not action-ably coercive. 56 Accurately disclosing circumstances or realities surrounding a recapitalization plan, such as informing shareholders that the majority shareholder will approve the transaction (thus making the recapitalization virtually assured) is *121 not actionably coercive. 57 Nor is it action-ably coercive to disclose, pursuant to the New York Stock Exchange rules, that a two-thirds vote of approval will maintain a stock’s status, 58 or that a change in federal legislation will cause assets to be categorized differently for tax purposes. 59 Similarly, a company’s choice to self-tender for a majority of shares through a dutch auction, thereby requiring the selling stockholders to determine the sale price within a range of possible prices specified by the buyer, is not actionably coercive. 60

On the other hand, as discussed previously, a board’s determination to self-tender for less than all of its shares for a higher price immediately following a third-party tender offer is actionably coercive. 61 A tender offer deliberately placed at an all-time low market price and accompanied by a board’s threat to delist the shares following the close of the offer was found actionably coercive. 62 In a post-trial decision, this court concluded that the “the tender offer price [offered by the board] was not likely to assure that the public minority stockholders would receive the true value of their shares” 63 and was ac-tionably coercive because “the public stockholders had to either accept this price and tender their shares or to hold on to their shares” in an environment that nearly guaranteed they would be devalued due to the board’s decision to delist, highly leverage the company, and probably not issue dividends for a number of years. In these situations, the board’s actions leveraged a shareholder’s position to induce an outcome based on matters unrelated to the merits of the corporation’s proposal. In such a compromised position, the Delaware courts have held that the board’s actions are likely to be considered strong arming and therefore actionably coercive.

In the case at hand, Plaintiffs allege three actionably coercive actions. First, Plaintiffs allege that the Board’s June 8 Solicitation omits material information relevant to the shareholders’ decisionmaking. These allegations are discussed infra. Second, Plaintiffs suggest that the Board’s requirement that tendering preferred shareholders consent to the elimination of certain existing rights of their preferred shares (“exit consents”) is actionably coercive. Third, Plaintiffs allege that the Elevation, or the Contingent Exchange, is ac-tionably coercive. I turn first to the exit consents.

2. Exit consents

Based on the evidence adduced to date, I am not persuaded that the exit consents in the Exchange Offer are action-ably coercive. Consequently, Plaintiffs have not shown a reasonable likelihood of *122 success as to this aspect of their challenge to the Exchange Offer. Under the Exchange Offer, a holder of 14/4% Preferred Stock who decides to tender her shares also must provide an exit consent to the stripping of various covenants from the remaining 14)4% shares. If more than 50 percent of the 14)4% shares tender, the covenant stripping will take effect.

As discussed above, this allegation, as In re General Motors explains, 64 manifests Plaintiffs’ attempt to put one foot in a new bargain, and still keep the other foot in the previous game by hedging, through the related covenant protection, the original bargain. A majority of 14)4% shareholders can either take the offered exchange of debt, thus removing themselves from their originally bargained for position, or choose to hold on to their 14/4% Preferred Stock. Plaintiffs contend that the non-tendering shareholders are then placed in an economically disadvantaged position. Although linking the vote on the covenants to the decision to tender threatens to reduce economic protections to non-tendering holders, the shareholders, in the aggregate, are free to choose between accepting the new debt securities (by tendering one’s shares), or staying in one’s place (and refusing to tender). Should a majority of the 14/4% Preferred Stock choose to support the Company’s decision to recapitalize in this manner, the elimination of the non-tendered shares’ covenants is merely an effect of the reality that a majority of the 14)4% peers have disagreed with the non-tendering shareholders and concluded that accepting the Exchange Offer is in their best interest. The amendment of the CD for the 14)4% Preferred Stock by the holders of a majority of that class of stock is authorized by the CD.

Further, ION’s Board had no duty to structure these transactions in a way to trigger the contractual covenants. To suggest that the Board must fashion an imitative recapitalization or favor one group of shareholders over the overall benefit to the corporation here would contravene the fundamental principle that a board may freely make decisions that benefit ION as a whole. Thus, I provisionally conclude that ION’s conditioning of a 14)4% Preferred Shareholder’s acceptance of the Exchange on that shareholder’s also providing a consent to delete certain covenants of the 14)4% Preferred Stock is not actionably coercive.

3. The Elevation provisions

Additionally, on the current record, I do not find the Elevation feature of the Exchange Offer actionably coercive. Accordingly, I conclude that Plaintiffs do not have a reasonable likelihood of success of prevailing on that aspect of their claims.

The Contingent Exchange aspect of the Exchange Offer is an integral part of the economics of the exchange and is, broadly, one aspect of a larger Exchange Offer designed to delever ION over time. The Exchange Offer results initially in only a modest reduction of fixed claims and fixed charges against the Company. Over time and with maximum participation, however, mandatory conversion of the newly issued convertible securities would create a major benefit in terms of “deleveraging” the Company. 65 This benefit also would inure to Plaintiffs and their class.

Defendants saw the Exchange Offer as part of a larger transaction designed to confer economic benefit on ION. For example, Frederick Smith, a member of the *123 ION Board and the Special Committee, expressed the view that, under the CIG/ NBCU Proposal, “the Corporation’s preferred stockholders would be offered a meaningful premium to incentivize participation in the proposed exchange offer” and provide an economic choice to participate. 66 As