October 17, 2011
$1.236 Billion of Foreshadowing in Delaware
On October 14, 2011, Chancellor Strine issued the opinion, In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011). As noted by Francis Pileggi, the opinion has more than 100 pages dedicated to explaining the myriad ways the company's directors breached their fiduciary duties.
When I first started reading the case, I couldn't help but think about receiving the opinion if I were an attorney on the case or one of the litigants. When I was in practice, it was FERC opinions or orders issued by an ALJ or the Commission, and I remember reading anxiously for hints in the first few paragraphs of where it was headed. This case had more than a billion dollars on the line, so I have to imagine everyone involved started reading it the moment they knew it was available.
So here's the start of In re Southern Peru Copper Corporation:
This is the post-trial decision in an entire fairness case. The controlling stockholder of an NYSE-listed mining company came to the corporation’s independent directors with a proposition. How about you buy my non-publicly traded Mexican mining company for approximately $3.1 billion of your NYSE-listed stock? A special committee was set up to “evaluate” this proposal and it retained well-respected legal and financial advisors.
The financial advisor did a great deal of preliminary due diligence, and generated valuations showing that the Mexican mining company, when valued under a discounted cash flow and other measures, was not worth anything close to $3.1 billion. The $3.1 billion was a real number in the crucial business sense that everyone believed that the NYSE-listed company could in fact get cash equivalent to its stock market price for its shares. That is, the cash value of the “give” was known. And the financial advisor told the special committee that the value of the “get” was more than $1 billion less.
Rather than tell the controller to go mine himself, the special committee and its advisors instead did something that is indicative of the mindset that too often afflicts even good faith fiduciaries trying to address a controller. Having been empowered only to evaluate what the controller put on the table and perceiving that other options were off the menu because of the controller’s own objectives, the special committee put itself in a world where there was only one strategic option to consider, the one proposed by the controller, and thus entered a dynamic where at best it had two options, either figure out a way to do the deal the controller wanted or say no.
As is probably clear, the special committee did not say no. And as you probably gathered, the court imposed roughly $1.236 billion in damages for their chosen course of action. There are 100 pages of explanation, but it was pretty clear where this one was going after about line four of the opinion.