Of the many, many reasons why Grupo Mexico, the controlling shareholder of the company previously known as Southern Peru Copper (now Southern Copper), believed that Chancellor Leo Strine erred when he awarded more than $2 billion to shareholders in a derivative suit -- and almost $305 million to shareholders' lawyers -- almost all are specific to the Southern Peru litigation. When Grupo Mexico filed an appeal last March, its lawyers at Simpson Thacher & Bartlett argued that Strine improperly excluded testimony from a Goldman Sachs witness familiar with the advice Goldman gave Southern Peru's Special Committee as it evaluated the acquisition of a company called Minera, which was also controlled by Grupo Mexico. Simpson claimed that Strine devised his own valuation method when he came up with a damages award. And it said the judge should never have approved fees to plaintiffs' lawyers at Prickett, Jones & Elliott and Kessler Topaz Kessler & Check that topped $35,000 an hour.
On Monday, to what is no doubt the jubilation of shareholder lawyers across the land, the Delaware Supreme Court said that Strine's fee award can stand. (Ronald Brown of Prickett Jones didn't return my call.) That was just the beginning of the bad news for Grupo Mexico, which was surely distressed that the Supreme Court rejected all of its other arguments as well. The court upheld Strine's judgment in a 110-page ruling that essentially lauds the chancellor for careful and well-explained analysis.
Why should anyone but Grupo Mexico and plaintiffs' lawyers care? Because deep within the decision is some dicta that could turn out to be significant beyond the bounds of legal fee awards and the specific details of this case. The state Supreme Court said that when it's not clear from pretrial discovery which side bears the burden of proving the fairness or unfairness of a transaction, it's up to the defendants to show it was fair.
That's been a gray area in deals that fall under the entire fairness standard of review, which comes into play when shareholders plausibly allege self-dealing by a controlling shareholder. As the Delaware court explained in the Grupo Mexico ruling, the burden of proof is ordinarily on defendants in an entire fairness case but can be shifted to shareholders under two circumstances. If defendants can show either that the deal was approved by a legitimate, independent board committee or that an informed majority of the minority shareholders voted for it, then shareholders have to show the proposed deal was not fair to minority shareholders.
The defendants in this case argued in a pretrial summary judgment motion that the burden of proof lay on shareholders, since Southern Peru had appointed an independent committee that performed a legitimate analysis of the deal. Strine denied the motion, ruling that he couldn't decide, without hearing the facts that would emerge at trial, where the burden lay. He ultimately ruled that the special committee didn't function effectively enough to shift the burden of proof to shareholders, but he also said that it didn't matter, since the deal was improperly vetted regardless of who had to show what.
In its appellate brief, Grupo Mexico said Strine had effectively "created a new doctrine" that would undermine the use of special committees. If other judges followed Strine's reasoning and refused to give corporations the right to shift the burden under the entire fairness standard, the brief said, businesses wouldn't go to the trouble of using special committees to evaluate deals.
The Delaware Supreme Court disagreed, in a tart reminder to Grupo Mexico that the "modest procedural benefit" of shifting the burden of proof in shareholder litigation shouldn't be the only reason a board appoints independent directors to evaluate a transaction. "This court has repeatedly held that any board process is materially enhanced when the decision is attributable to independent directors," the en banc ruling said. "Accordingly, judicial review for entire fairness of how the transaction was structured, negotiated, disclosed to the directors, and approved by the directors will be significantly influenced by the work product of a properly functioning special committee of independent directors.... Therefore, the proponents of an interested transaction will continue to be incentivized to put a fair dealing process in place that promotes judicial confidence in the entire fairness of the transaction price."
But just to remove any uncertainty that might result from cases like this, in which the burden of proof is too fact-intensive to be decided on summary judgment motions, the Supreme Court said defendants should assume the worst. "We hold prospectively that, if the record does not permit a pretrial determination that the defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction," the decision said.
In other words, unless there's a pretrial ruling to the contrary, defendants must show the transaction was fair to minority shareholders, regardless of whether an independent committee oversaw the deal. And if you're a defendant who might have preferred uncertainty to the surety that you're stuck with the burden of proof, take it up with Grupo Mexico.
(Reporting By Alison Frankel)
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