Applying
the entire fairness doctrine, the Delaware Supreme Court upheld the Chancellor’s
ruling that a board special committee formed to evaluate a proposition by the
company’s controlling shareholder engaged in a deal that was unfair to the
company and breached its fiduciary duty of loyalty. Chancellor Strine found
that the cramped perspective of the special committee put it in a position
where there was only one strategic option to consider, the one proposed by the
controlling shareholder. This resulted in a strange deal dynamic in which a
majority stockholder kept its eye on the ball, actual value benchmarked to
cash, and a special committee lost sight of market reality in an attempt to
rationalize doing a deal of the kind the majority stockholder wanted, which was
for the company to buy its non-public company for approx $3.1 million of the
company’s stock. (In Re Southern Peru Copper Corporation Shareholder Derivative
Litigation; Americas Mining Corp. v. Theriault, No. 29, 2012, Del Supreme Ct, Aug.
27, 2012).
The
Supreme Court noted that, while the entire fairness standard has two components,
process and price, the entire fairness analysis is not a bifurcated one. All
aspects must be examined as a whole since the question is one of entire fairness.
Indeed, said the Court, in a
non-fraudulent transaction, price may be the preponderant consideration
outweighing other features of the merger. While evidence of fair dealing has
significant probative value to demonstrate the fairness of the price obtained,
noted the Court. the paramount consideration, is whether the price was a fair
one.
The Court of Chancery found that the process
by which the merger was negotiated and approved was not fair and did not result
in the payment of a fair price. Because the issues relating to fair dealing and
fair price were so intertwined, said the Supreme Court, the Court of Chancery
did not separate its analysis, but rather treated them together in an
integrated examination. According to the Supreme Court, that approach is consistent
with the inherent non-bifurcated nature of the entire fairness standard of
review.
Although
the members of the special committee were competent and well-qualified, noted
the Chancellor, from inception the special committee fell victim to a
controlled mindset and allowed the controlling shareholder to dictate the terms
and structure of the deal. The special committee did not insist on the right to
look at alternatives; rather, it accepted that only one type of transaction was
on the table, a purchase of the non-public company.
The
special committee was trapped in a controlled mindset where the only options to
be considered were those proposed by the controlling stockholder. This mindset
took off the table other options that would have generated a real market check,
noted the Chancellor, and also deprived the special committee of negotiating
leverage to extract better terms. In fact, said the court, the negotiations
were stilted and influenced by the committee’s uncertainty about whether it was
actually empowered to negotiate.
When a
special committee confines itself to this world, reasoned the Chancellor, it
engages in the self-defeating practice of negotiating with itself, perhaps without
even realizing it, through which it nixes certain options before even putting
them on the table. Although the special committee members were competent
businessmen and may have had the best intentions, said the court, they allowed
themselves to be hemmed in by the controlling stockholder’s demands. Throughout
the negotiation process, the special committee and its outside advisor only
focused on finding a way to get the terms of the merger structure proposed by
the controlling shareholder to make sense, rather than aggressively testing the
assumption that the merger was a good idea in the first place.
The Supreme Court emphasized that entire
fairness is a standard by which the Court of Chancery must carefully analyze
the factual circumstances, apply a disciplined balancing test to its findings,
and articulate the bases upon which it decides the ultimate question of entire
fairness. The record reflected that the Court of Chancery applied a disciplined
balancing test, taking into account all relevant factors. The Court of Chancery
considered the issues of fair dealing and fair price in a comprehensive and
complete manner. The Court of Chancery found the process by which the merger
was negotiated and approved constituted unfair dealing and that resulted in the
payment of an unfair price.
The Supreme Court emphasized that Chancery’s
post-trial determination of entire fairness must be accorded substantial
deference on appeal. The
Court of Chancery’s factual findings are supported by the record, held the
Supreme Court, and its conclusions are the product of an orderly and logical
deductive reasoning process. Thus, the Supreme Court affirmed the Court of
Chancery’s judgment that the Merger consideration was not entirely fair.