Craig Williams posts on his blog May It Please The Court about the recent decision of Chancellor Chandler in the case of In Re Telecommunications Shareholder Litigation, download file. The 43-page decision, as revised on Jan. 10, 2006, addressed many issues, such as the “entire fairness” standard which must be proven by parties who are on both sides of a transaction instead of them enjoying the presumptions of the Business Judgment Rule. The court denied a Motion for Summary Judgment due to questions about a Special Committee’s independence and whether it was fully informed. Craig Williams discusses the case in the context of the 1985 Delaware Supreme Court decision in Smith v. Van Gorkom, which is often credited with requiring fairness opinions, and a pending SEC Rule that addresses the issue. Here is the link:
Making Fairness Opinions Fair For Everyone | WLF | May it Please the Court Law Weblog.
Here are a few more details about the decision:
The case involved claims of nondisclosure in proxy statements made in connection with a merger. The court noted that Delaware follows the federal standard for determining materiality of admitted information, as described in TSC Industries v. Northway, 426 U.S. 438, 449 (1976); Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). See also Orman v. Cullman, 794 A.2d 5, 35 (Del. Ch. 2002) (Information contained in document incorporated by reference was sufficiently disclosed). The court determined that the non-disclosure of the plan to reasonably compensate the members of the Special Committee could be material to the reasonable shareholder. The court reasoned that compensation of Special Committee members “that is contingent, ambiguous, or otherwise uncertain, raises a triable issue of material fact as to what each member anticipated in the event that the Special Committee approved the transaction, and whether such anticipated reward was significant to the reasonable shareholder.” The court passed over, for the moment, the reasonableness of a $1 million payment for four meetings and the effect on the Special Committee member who might be influenced by such compensation which would be impacted by his opinion on approving the transaction. The court applied the entire fairness standard (and thus did not apply the presumption of the business judgment rule that the directors acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the company, because the challenged director stood on both sides of the transaction.) The court discussed the analysis that applies to determine the independence of directors.
Importantly, the court questioned the independence of the legal advisors of the Special Committee. See generally, Jedwab v. MGM Grand Hotels, Inc. , 509 A.2d 584, 598 (Del. Ch. 1986) (If a controlling shareholder for whatever reason (for example to avoid litigation) elects to sacrifice some part of the value of his stockholdings, the law will not direct him as to how that amount is to be distributed and to whom.)