In this en banc opinion, the Delaware Supreme Court affirmed the Court of Chancery’s ruling in In re S. Peru Copper Corp. S’holder Derivative Litig., 30 A.3d 60 (Del. Ch. 2011), awarding base damages of $1.263 billion to plaintiff, including $304 million of attorney’s fees. The Delaware Supreme Court also held that the Court of Chancery did not commit reversible error by failing to allocate the burden of proof before trial for purposes of determining the entire fairness of the challenged transaction.
This appeal arose out of an action brought by appellee Michael Theriault, a stockholder in Southern Copper Corp., f/k/a Southern Peru Copper Corp. (“Southern Peru”), relating to the sale by Southern Peru’s controlling stockholder of its 99.15% interest in a non-public Mexican mining company, Minera México, S.A. de C.V. (“Minera”), to its subsidiary. Prior to the completion of the challenged transaction (the “Merger”), Grupo México, S.A.B. de C.V. (“Grupo Mexico”), a Mexican mining company, owned 99.15% of Minera. Before the Merger, Grupo Mexico also owned a controlling interest in Southern Peru, with 54.17% of the outstanding capital stock and 63.08% of the voting power. In 2004, Grupo Mexico approached Southern Peru, offering to sell its entire interest in Minera through an all-stock merger in a deal valuing Minera at nearly $3.05 billion. Given Grupo Mexico’s self-interest in any sale of Minera to Southern Peru, Southern Peru formed a Special Committee of disinterested directors to evaluate the proposed transaction. After eight months of negotiations, during which the Special Committee received numerous financial presentations from its independent financial advisor, Goldman, Sachs & Co. (“Goldman Sachs”), the Special Committee approved the Merger, and the transaction closed nearly five months later. By the time the Merger closed, the value of the Southern Peru shares acquired by Grupo Mexico had risen to $3.75 billion.
Appellee brought a derivative action in the Court of Chancery on behalf of Southern Peru, alleging that the Merger was unfair to Southern Peru and its minority stockholders because the value of what Grupo Mexico received in the Merger far exceeded what Grupo Mexico contributed. The Court of Chancery determined in a post-trial opinion that the Merger was unfair to Southern Peru’s stockholders, and held that director defendants not serving on the Special Committee as well as Grupo Mexico were liable to plaintiff. Finding that the most appropriate relief would be a damages award approximating the difference between the price that the Special Committee actually paid for Minera and the price the Special Committee would have paid had the Merger been entirely fair, the Court of Chancery awarded $1.263 billion in damages plus simple interest calculated at a statutory rate.
In the instant appeal, the Supreme Court affirmed the Court of Chancery’s finding that the process by which the Merger was negotiated and approved was not entirely fair, noting that the lower court’s “integrated examination” of the fairness of the transaction was consistent with the “non-bifurcated nature of the entire fairness standard.” Rejecting appellants’ argument that the Court of Chancery failed to comprehend Goldman Sachs’ relative value analysis of Minera, the Supreme Court held that the Court of Chancery’s factual findings were supported by the trial record and resulted from an “orderly and logical deductive reasoning process.” The Supreme Court similarly found the $1.263 billion base damages award to be reasonable, holding that the Court of Chancery properly exercised its “broad historical discretionary powers in fashioning a remedy,” and noting that the Court of Chancery set forth its analysis for the calculation of damages in “meticulous detail.” Turning to the award of $304 million in attorney’s fees and expenses, which represented 22.5% of appellee’s total recovery plus post-judgment interest, the Supreme Court dismissed appellants’ argument that the Court of Chancery accorded improper weight to the benefit achieved by plaintiff’s litigation. Reviewing the factors articulated Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del. 1980), the Supreme Court held that the Court of Chancery “carefully weighed and considered” the appropriate Sugarland factors, and determined that the fee award represented a proper exercise of the Court of Chancery’s discretion.
With respect to appellants’ argument that the Court of Chancery committed reversible error by failing to determine whether appellants or appellee bore the burden of proof prior to trial and erred further by allocating the burden of proof to appellants, the Supreme Court acknowledged the “modest procedural benefit” achieved by the burden shift under the entire fairness standard. The Supreme Court nonetheless concurred with the Court of Chancery that the evidence of unfairness in the Special Committee’s process was “so overwhelming” that the question of which party held the burden of persuasion was irrelevant to the outcome of the litigation. The Supreme Court further held prospectively that, to the extent a trial court fails to reach a pre-trial determination as to which party bears the burden of persuasion, the burden of persuasion will remain with the defendants to establish the entire fairness of an interested transaction throughout trial. Noting that a fair process typically results in a fair price under the entire fairness standard, the Supreme Court concluded that the use of a “properly functioning” special committee comprised of independent directors and the informed approval of a majority of minority stockholders would continue to represent “best practices” utilized by Delaware corporations to prove the fairness of a challenged transaction, but would not result in the application of the business judgment rule to such a challenged transaction.
The full opinion is available here.