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Although last week Charter Communications Inc. filed proxy materials to oppose Time Warner Cable Inc.’s merger with Comcast Corp., the TWC directors may have a bigger concern: a court decision handed down in Delaware in March after the Comcast merger agreement was signed.

In the decision, the Delaware court criticized Rural/Metro Corp.’s board for deciding to sell the company for a price that did not exceed “what the corporation otherwise would generate for stockholders over the long-term.” In reaching its conclusion, the court applied the so-called Revlon standard of judicial enhanced scrutiny of board decisions in connection with a sale of a company. Under Revlon, a board is required to obtain the highest reasonably attainable value if control of a company is being sold for cash and in the case of some stock-for-stock mergers.

The court in Rural/Metro in my view extended the Revlon requirement by saying that a company needs to turn down a sale, even if it is at the best price available, if the purchase price does not exceed the value the company could attain by remaining a public company.

The same Revlon standard probably will apply to the TWC sale to Comcast. There are arguments against applying Revlon to the TWC deal. The enhanced scrutiny test does not generally apply to a deal in which the buyer is paying with stock of a public company. The theory is that the shareholders can obtain a control premium in a future sale of the new parent company. However, Revlon does apply if the stock is issued by a company already controlled by someone else. In my view, Comcast would likely be seen as already being controlled by Brian Roberts, its chairman and CEO. He owns a separate class of Comcast stock that entitles him to a “non dilutable” right to one-third of the votes at any meeting of Comcast shareholders. Plus, that stock would be entitled to a separate class vote on certain mergers, which would give him veto power over a sale of Comcast.

Assuming the Revlon requirements apply, then TWC directors should be thinking about how the recently enunciated Rural/Metro interpretation requiring the price to exceed the long-term value affects the Comcast deal. We don’t know precisely what value the TWC board thinks TWC “would generate for stockholders over the long term.” The opinions of three different investment bankers on the fairness of the price to TWC shareholders were attached to the draft proxy statement/prospectus of the deal filed last month, but their specific analysis of the value of TWC has not yet been made public. But we have some indication of what the TWC board thought the company was worth when it told Charter last December that it wanted $160 per share in value before selling the company to Charter, plus a “collar” to protect TWC shareholders from a decline in value of Charter shares between signing and closing. Comcast came close to the $160 value in its February deal, but the deterioration in its stock price has caused the market value of its offer to decline since there was no collar in the Comcast deal.

On Friday, with Comcast shares around $50, its offer for TWC was worth about $144 a share, versus $158.82 at the time of the February announcement. If the Comcast stock stays at this level or declines, and the day approaches where the TWC directors will have to include its recommendation in its proxy statement, the board’s moves are complicated by the court decision.

That doesn’t mean there is any significant likelihood that the TWC board will change its recommendation, at least in the absence of a higher bid. The decision, for example, has yet to be blessed by the Delaware Supreme Court. But for now the TWC directors will need to struggle with that decision as written.
