Delaware Supreme Court Changes Law on Burden Shifting in Conflict of Interest Cases and Upholds Huge Damages and Attorney Fee Award


In a highly anticipated decision, on August 27, the Delaware Supreme Court upheld Chancellor Leo Strine’s October 2011 trial decision in the Southern Peru Copper case. The Supreme Court’s opinion announced new law on burden-shifting in entire fairness cases—that is, cases where the presence of a controlling shareholder on both sides of the transaction triggers the most searching level of judicial review. Previously in such cases, under Khan v. Lynch, the presence of a well-functioning special committee process that was not under the influence of the controlling shareholder would shift the burden to plaintiffs to prove that a transaction was not entirely fair.

Because the question of the effectiveness of a special committee is difficult to resolve at the pleading stage, the clear principle established by Khan v. Lynch has often proved difficult to apply in practice. Such was the case in Southern Peru, where the Chancellor reserved his decision on which party had the burden of proof until after hearing all evidence. This creates a practical difficulty for parties, whose preparation for and presentations at trial are heavily influenced by which side bears the burden. Under the Supreme Court’s decision in Southern Peru, in future cases, absent the ability to demonstrate in advance of trial that defendants are entitled to a burden shift in their favor, “the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the transaction.”

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