The Delaware Supreme Court today, in the case of Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), read here, in a 110-page opinion, upheld the Court of Chancery’s 100-plus page decision awarding over $2 billion in damages based on a breach of fiduciary duty claim in connection with the sale of a company. Delaware’s High Court also upheld an award of attorneys’ fees in the amount of $300 million. The trial court decision, styled as In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), was highlighted on these pages here and here.
Prof. Paul L. Regan provides scholarly commentary and practical insights here. For example, regarding the shifting of the burden of proof that may apply if a special committee is truly independent, the good professor observed that the Supreme Court in this opinion:
clarified in such cases going forward that the burden of persuasion would remain “with the defendants throughout the trial to show the entire fairness of the interested transaction.” In this regard, the Supreme Court’s ruling is likely in keeping with the advice of counsel to controlling stockholders in such cases already, i.e., establish a special committee process that is unassailable but prepare for trial as if the burden of proof remains on the defendants. For transaction planners and litigation counsel alike, Southern Peru appropriately reinforces the practical reality that defendants in these cases need to protect the transaction with good process irrespective of whether they get the burden shift before, at or after trial.
Professor Stephen Bainbridge provides expert analysis about the case here, including discussion of the burden of proof issue. The Wall Street Journal’s Law Blog wrote about the case here.
UPDATE: On Sept. 21, 2012, the Supreme Court denied a motion for reargument. Delaware’s High Court rejected the argument in the motion that because the 81% majority shareholder would be “paying itself” the amount of the derivative judgment, the amount of the attorneys’ fees should not include its proportionate interest. The Court explained that no stockholder has a claim to any assets of the corporation. A derivative award is for the benefit of the corporation. Slip op. at 114. The Court refused to treat this derivative award as if it were a class action for the benefit of minority shareholders only.
In addition to the foregoing scholarly insights, I provide the following bullet points with key statements of important principles from the opinion about Delaware law on topics that Delaware practitioners will have frequent need to refer to in corporate and commercial litigation matters:
- Scheduling orders: Delaware’s High Court underscored the well-settled Delaware truism that these have the “same force and effect as court orders” and any request to change them is “entrusted to a trial judge’s discretion”. Slip op. at 52-53. The eleventh-hour request to modify long-standing trial dates would have been unfair to the plaintiff and the record supports the trial court’s decision based on a logical deductive reasoning process.
- Burden Shifting: When a transaction involving self-dealing by a controlling shareholder is challenged, “the applicable standard of judicial review is entire fairness, with the defendants having the burden of persuasion. In other words, the defendants have the burden of proving that the transaction with the controlling stockholder was entirely fair to the minority stockholders.” See footnote 17 and accompanying text.
- Two ways to shift that burden are: First, demonstrating that the transaction was approved by a “well-functioning committee of independent directors; or second, … that the transaction was approved by an informed vote of a majority of the minority shareholders.” (citing Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994)).
- Lynch and its progeny set forth what is required in order for an independent committee to obtain a burden shift. See footnotes 28 to 35. In this case it did not matter, as noone could have met the burden. The trial court observed that “it was not stuck in equipoise” about the issue of fairness, and found that the deal was unfair regardless of who had the burden. Although the members of the special committee were independent and well-qualified, the Court explained why how they “fell victim to a controlled mindset and allowed Grupo Mexico to dictate the terms and structure of the Merger.” Slip op. at 68.
- Damages for breach of the duty of loyalty: The Court acknowledged Chancery’s broad powers generally to fashion “custom-made” relief, and in particular when it comes to awarding damages for breach of the duty of loyalty, it has even greater discretion. See footnotes 64 – 66 and accompanying text.
- Attorneys’ Fees in Contingency/Derivative cases: The Court interpreted the reasonableness requirement of Rule 1.5(c) of the Rules of Professional Conduct to allow contingency fees that may have the net effect of translating into “very high” hourly rates. (In this case, the hourly rate computed to about $35,000 per hour.) Slip op. at 86. The Court also described the historical underpinnings of the “common fund doctrine” as a well-established basis to award fees in representative litigation. See footnotes 70 to 73. The Court discussed and applied the standards outlined in Sugarland Indus., Inc. v. Thomas, 420 A2d 142, 149-50 (Del. 1980).
- No Cap on Amount of Fees. Importantly, Delaware’s High Court ruled that: “we decline to impose either a cap or the mandatory use of any particular range of percentages for determining attorneys’ fees in megafund cases.” Slip op. at 105. The reasoning in part was due to an unwillingness to limit Chancery’s capacious authority to fashion remedies and award fees with “new mechanical guidelines.”. See footnote 125 and accompanying text.