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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

S. MUOIO & CO. LLC, on behalf of itself and ) the class and derivatively on behalf of CROWN ) ) MEDIA HOLDINGS, INC., ) ) Plaintiff, ) ) Civil Action No. 4729-CC v. ) ) HALLMARK ENTERTAINMENT INVESTMENTS CO., a Delaware corporation, ) ) HALLMARK ENTERTAINMENT ) HOLDINGS, INC., a Delaware corporation, H C CROWN CORP., a Delaware corporation, ) ) H.A., INC., a Delaware corporation, ) HALLMARK CARDS, INC., a Missouri corporation, WILLIAM J. ABBOTT, DWIGHT ) C. ARN, WILLIAM CELLA, GLENN CURTIS, ) ) STEVE DOYAL, BRIAN E. GARDNER, HERBERT A. GRANATH, DAVID E. HALL, ) ) DONALD J. HALL, JR., IRVINE O. ) HOCKADAY, JR., A. DRUE JENNINGS, ) PETER A. LUND, BRAD R. MOORE, ) DEANNE R. STEDEM, ) ) Defendants, ) ) and ) ) CROWN MEDIA HOLDINGS, INC., a ) Delaware corporation, ) ) Nominal Defendant.

MEMORANDUM OPINION Date Submitted: December 31, 2010 Date Decided: March 9, 2011

Kevin G. Abrams, T. Brad Davey and Matthew F. Davis, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Harvey Kurzweil, James P. Smith III and Corinne D. Levy, of DEWEY & LEBOEUF LLP, New York, New York, Attorneys for Plaintiff. Martin P. Tully, Jon E. Abramczyk, Leslie A. Polizoti, Pauletta J. Brown and Ryan J. Greecher, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendants Dwight C. Arn, Steve Doyal, Brian E. Gardner, David E. Hall, Donald J. Hall, Jr., Irvine O. Hockaday, Jr., Brad R. Moore, Deanne R. Stedem, Hallmark Entertainment Holdings, Inc., H C Crown Corp., H.A., Inc., and Hallmark Cards, Inc. Gregory P. Williams, Thomas A. Beck, Brock E. Czeschin and Blake Rohrbacher, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Defendants Herbert A. Granath, A. Drue Jennings, and Peter A. Lund. Kurt M. Heyman, Patricia L. Enerio and Dominick T. Gattuso, of PROCTOR HEYMAN LLP, Wilmington, Delaware, Attorneys for Nominal Defendant Crown Media Holdings, Inc. and Defendants William Abbott, William Cella, and Glenn Curtis.

CHANDLER, Chancellor

This action challenges the fairness of the June 29, 2010 recapitalization (the "Recapitalization") of Crown Media Holdings, Inc. ("Crown" or the "Company") orchestrated by Crown's controlling stockholder and primary debt holder, Hallmark Cards, Inc. and its affiliates (collectively "Hallmark"). 1 For years, Crown was unable to make its debt payments, and was forced to obtain extensions on the debt from Hallmark. In the Recapitalization, Hallmark exchanged its

Crown debt for an increased percentage of Crown's Class A common stock, new preferred stock and a new and far smaller amount of debt with longer maturities, thereby permitting Crown to avoid a debt default and bankruptcy. Hallmark initially proposed a recapitalization on May 28, 2009. Crown's board immediately created a Special Committee to consider the proposed recapitalization. Before the Special Committee could even consider the proposed recapitalization, S. Muoio & Co. LLC (a Crown stockholder) filed this action on July 13, 2009, seeking to enjoin the proposed transaction. The parties agreed to a stay of the litigation while the Special Committee considered Hallmark's proposal. They also agreed that Crown would not consummate any transaction without providing seven week's advance written notice to Muoio's counsel of the terms of the transaction. The parties further stipulated that in the event Muoio decided to

The relevant affiliates are defendants Hallmark Entertainment Investment Co., Hallmark Entertainment Holdings, Inc., H C Crown Corp., and H.A., Inc.

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pursue a preliminary injunction against the transaction, the parties would establish a schedule for its resolution during the seven week period. Almost seven months later, on February 9, 2010, Crown announced that Hallmark and Crown had approved and executed a non-binding term sheet in connection with the Recapitalization. On March 1, 2010, Crown announced it had entered into a Master Recapitalization Agreement memorializing the terms of the Recapitalization. After receiving that notice, however, Muoio eschewed any

preliminary injunction proceedings, and instead filed an amended and supplemental complaint on March 11, 2010, dropping its request for injunctive relief and seeking rescission of the transaction. The Recapitalization closed on June 29, 2010. Plaintiff contends that the Recapitalization was consummated at an unfair price and drastically undervalued Crown. In so doing, plaintiff asserts that Crown should be valued based on a discounted cash flow ("DCF") analysis, and that a properly conducted DCF analysis establishes that Crown's stock is worth far more than the Recapitalization, which is valued at $2.59 per share. Plaintiff also

contends that Hallmark imposed the Recapitalization on the Company through an unfair process, that the Hallmark-dictated terms of the new debt and preferred stock are unfair, and that the Recapitalization unfairly transferred significant value and voting power from the Crown minority stockholders to Hallmark. In sum,

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plaintiff insists that the Recapitalization substantially undervalued the Company, resulting in an enormous, unjustified transfer of wealth and voting power from the Crown minority stockholders to Hallmark, all through an unfair process that included an ineffective Special Committee and Hallmark's domination of the negotiation process. This case was tried over a four-day period, from September 21 through September 24, 2010. The parties concede that the appropriate standard of review is entire fairness. I have considered the parties' post-trial briefs, and during trial I assessed the strength and credibility of the testimony offered by the various witnesses. Ultimately, my decision turns on the following factual findings: the Crown board's process was not flawed; the Special Committee was independent and negotiated at arm's length; and the record clearly demonstrates that Crown was underwater at the time of the Recapitalization--that is, it could not pay its debts as they became due and absent the Recapitalization, default or bankruptcy seemed inevitable. In addition (as is now quite common in cases of this nature), the valuation question, in part, resulted in a battle of the experts--and in this case, plaintiff's expert lost. His proffered opinion was far less credible and persuasive

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than defendants' experts. For the reasons more fully explained below, I find in favor of defendants and conclude that the Recapitalization was entirely fair.2 I. BACKGROUND A. The Parties Plaintiff Muoio is a New York securities advisory firm and a holder of Crown's Class A common stock. Salvatore Muoio is plaintiff's principal owner and manager. Defendant Hallmark, a Missouri corporation headquartered in Kansas City, Missouri, is engaged in the manufacture and distribution of personal expression products. Immediately before the Recapitalization proposal, Hallmark controlled approximately 80.1% of Crown's outstanding shares; following the proposal it now controls approximately 90.3%.3 Nominal Defendant Crown is a Delaware corporation with its principal place of business in Studio City, California. Crown's revenues are largely tied to

advertising revenue, which in turn is driven by the ratings and demographics of its cable television channels. Crown competes for both ratings and key demographics with large media companies that are able to spread their costs across multiple cable
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I have considered the parties' briefing regarding numerous outstanding objections to the admissibility of testimony, reports, exhibits, documents, demonstrative exhibits, rebuttal exhibits and testimony, and handwritten notes. I overrule all of the objections and admit all of the items which are the subject of these continuing objections. I will accord each item the weight and credibility that it appropriately deserves. 3 See JX 145 (Crown Schedule 13D/A); JX 85 (Crown Form 8-K (June 29, 2010)).

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channels.

Crown's board includes the Special Committee defendants and

defendants William J. Abbott, Dwight C. Arn, William Cella, Glenn Curtis, Steve Doyal, Brian E. Gardner, David E. Hall, Donald J. Hall, Jr., Irvine O. Hockaday, Jr., Brad R. Moore, and Deanne R. Stedem. The Special Committee consists of defendants Herbert A. Granath, A. Drue Jennings, and Peter A. Lund. Granath has been a Crown director since December 2004 and has extensive experience in the broadcast and cable television industries. He served as the chairman of Disney/ABC International Television, and he also developed and was the chairman of several cable networks for ABC, including ESPN, A&E, the History Channel, and Lifetime.4 He was also the chairman of the National Academy of Television Arts and Sciences and has won several awards for his work in the industry.5 Lund has been a Crown director since 2000, and has extensive experience in the media sector. Lund had a long career with CBS, serving as president and CEO of CBS Television and Cable Networks and later, as president and CEO of CBS Inc. 6 He is also currently a director of DirecTV. 7 Jennings served for twelve years as the CEO of Kansas City Power & Light Company, a publicly traded company on the New York Stock Exchange. As a prominent leader in the Kansas City community, Jennings has been actively
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Trial Transcript ("Tr.") 583-87 (Granath). Tr. 588-89 (Granath). 6 Tr. 428-30 (Lund). 7 Tr. 431 (Lund).

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involved with several civic associations, including the Midwest Research Institute and the Bloch Endowment Fund at the Greater Kansas City Community Foundation. 8 He also served on numerous advisory boards, including the

University of Kansas Medical Center and University of Kansas Endowment Association. He has been "of counsel" with the law firm Polsinelli Shughart P.C. since October 2004.9 Jennings joined the Crown board in 2006 and he is the chair of Crown's Audit Committee. B. Crown's Formation and its Debt Crisis In 1991, Hallmark created the family entertainment platform that became Crown following a review of its business units, which also include Crayola and other family oriented subsidiaries. 10 In the early 1990s, Hallmark acquired an extensive production library of programming that was designed to appeal to all ages. In 1998, Hallmark partnered with the National Interfaith Cable Coalition ("NICC") to relaunch the Odyssey Network as a family-friendly cable network.11 The network was later renamed as "Hallmark Channel." Crown Media Holdings was created in 2000 to effectuate an initial public offering of Crown, providing the Company with additional capital to fund its development.

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See, e.g., Tr. 663-64, 673, 734-37 (Jennings). Pre-Trial Stipulation and Order ("PTO")

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