When a Special Committee Is Not So Special: Delaware Supreme Court Affirms Decision Holding Controlling Shareholder and Affiliated Directors Liable for More Than $2 Billion Stemming from Related-Party Transaction


Sometimes, a special committee is not so special. On August, 27, 2012, the Delaware Supreme Court upheld a Chancery Court decision ordering the controlling shareholder of Southern Copper Corporation, formerly Southern Peru Copper Corporation, and its directors affiliated with the controlling shareholder to pay more than $2 billion for breaching their fiduciary duty. The breach stemmed from Southern Copper’s acquisition of another entity almost entirely owned by the controlling shareholder. The hammer came down despite the existence of the recognized insulating measure of a special committee of independent directors.

In In re Southern Peru Copper Corporation Shareholder Derivative Litigation, Chancellor Strine peeled away the veneer of ostensibly good special committee practice, looking very carefully at the “substance, and efficacy, of the negotiations” by the special committee, and found that the acquisition was not entirely fair, regardless of who had the burden of persuasion. In affirming, the Delaware Supreme Court emphasized that the procedural benefit of shifting the burden of persuasion to the plaintiff which may be obtained by either the favorable recommendation of a well-functioning special committee of independent directors or an informed approving vote of a majority of the minority shareholders is “modest.” The Court held that, where the complicated facts of the case prevent a determination of who bears the burden of persuasion prior to trial, the burden remains on the defendant to prove the entire fairness of the transaction.

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