Source: https://www.leagle.com/decision/1993979634a2d3451976
Timestamp: 2017-08-20 11:47:19
Document Index: 632373954

Matched Legal Cases: ['§ 262', '§ 141', '§ 141', '§ 144', '§ 144', '§ 144', '§ 144', '§ 144', '§ 141', '§ 4', '§ 144', '§ 144', '§ 144']

CEDE & CO. v. TECHNICOLOR | 634 A.2d 345 (1993) | Leagle.com
634 A.2d
CEDE & CO. and Cinerama, Inc., Petitioners Below, Appellants/Cross-Appellees, v. TECHNICOLOR, INC., Respondent Below, Appellee/Cross-Appellant. CINERAMA, INC., a New York corporation, Plaintiff Below, Appellant/Cross-Appellee, v. TECHNICOLOR, INC., a Delaware corporation, Morton Kamerman, Arthur N. Ryan, Fred R. Sullivan, Guy M. Bjorkman, George Lewis, Jonathan T. Isham, MacAndrews & Forbes Group, Incorporated, a Delaware corporation, Macanfor Corporation, and Ronald O. Perelman, Defendants Below.
Revised: November 1, 1993.
Upon Return to Remand for Clarification January 18, 1994.
Summary of Principal Holdings
This appeal from final judgment of the Court of Chancery encompasses consolidated suits: a first-filed Delaware statutory appraisal proceeding (the "appraisal action"), and a later-filed shareholders' individual suit for rescissory damages for "fraud" and unfair dealing (the "personal liability action") brought by plaintiffs, Cinerama, Inc. ("Cinerama"), a New York corporation, and Cede & Co. ("Cede"), the owner of record. The actions stem from a 1982-83 cash-out merger in which Technicolor, Incorporated ("Technicolor"), a Delaware corporation, was acquired by MacAndrews & Forbes Group, Incorporated ("MAF"), a Delaware corporation, through a merger with Macanfor Corporation ("Macanfor"), a wholly-owned subsidiary of MAF.1 Under the terms of the tender offer and later cash-out merger, each shareholder of Technicolor (excluding MAF and its subsidiaries) was offered $23 cash per share.
Plaintiff Cinerama was at all times the owner of 201,200 shares of the common stock of Technicolor, representing 4.405 percent of the total shares outstanding. Cinerama did not tender its stock in the first leg of the MAF acquisition commencing November 4, 1982; and Cinerama dissented from the second stage merger, which was completed on January 24, 1983. After dissenting, Cinerama, in March 1983, petitioned the Court of Chancery for appraisal of its shares pursuant to 8 Del.C. § 262. In pretrial discovery during the appraisal proceedings, Cinerama obtained testimony leading it to believe that director misconduct had occurred in the sale of the company. In January 1986, Cinerama filed a second suit in the Court of Chancery against Technicolor, seven of the nine members of the Technicolor board at the time of the merger, MAF, Macanfor and Ronald O. Perelman ("Perelman"), MAF's Chairman and controlling shareholder. Cinerama's personal liability action encompassed claims for fraud, breach of fiduciary duty and unfair dealing, and included a claim for rescissory damages, among other relief. Cinerama also claimed that the merger was void ab initio for lack of unanimous director approval of repeal of a supermajority provision of Technicolor's charter.
Following an extended trial and after further discovery, the Chancellor elected to decide first the appraisal suit. The court did so notwithstanding this Court's implicit instruction in Cede I. 542 A.2d at 1189, 1191.2 By unreported decision (the "Appraisal Opinion") dated October 19, 1990, the Chancellor found the fair value of the dissenting shareholders' Technicolor stock to be $21.60 per share, as of January 24, 1983, the date of the merger. In June 1991, the court, in a second unreported decision (the "Personal Liability Opinion"), 1991 WL 111134, found pervasive and persuasive evidence of the defendant directors' breach of their fiduciary duties, but concluded that Cinerama had not met its burden of proof. On that ground, the Chancellor entered judgment for the defendants. The court also found no merit in Cinerama's further claims: that the merger was void ab initio; that Technicolor's directors had breached their duty of disclosure in their 14D-9 filing and proxy statement; and that MAF and Perelman, on becoming controlling shareholders of Technicolor, breached fiduciary duties owed Cinerama entitling Cinerama to rescissory damages. Cinerama then appealed both decisions.
In 1970 Technicolor was a corporation with a long and prominent history in the film/audio-visual industries. Technicolor's core business for over thirty years had been the processing of film for Hollywood movies through facilities in the United States, England and Italy. In its field, Technicolor was the most prominent of a handful of companies. Notwithstanding Technicolor's dominance within its field, the company, by the late seventies, decreased in competitiveness. Its major film processing laboratory was, in the words of Morton Kamerman ("Kamerman"), its Chief Executive Officer and Board Chairman,4 "totally out of control" and it was taking losses that were "unacceptable."
Kamerman proposed that Technicolor enter the field of rapid processing of consumer film by establishing a network of stores across the country offering one-hour development of film, with quality service at competitive prices. The business, named "One Hour Photo" ("OHP"), would require Technicolor to open approximately one thousand stores over the next five years and to invest about $150 million. In May 1981, Technicolor's Board of Directors approved Kamerman's plan. The following month Technicolor announced its ambitious venture with considerable fanfare. On the date of its OHP announcement, Technicolor's stock had risen to a high of $22.13.5
Perelman was aware of the financial constraints imposed upon MAF by its lender banks. Perelman's lender banks had gone on record as being opposed to financing a hostile bid.6 Perelman was also aware that Technicolor's certificate of incorporation contained a supermajority provision requiring a shareholder vote of ninety-five percent of the outstanding shares for approval of a merger. Advised of this constraint, Perelman, in early September, sought advice from his investment banker on "how to get his foot in Technicolor's door." Personal Liability Opinion at 10.
Perelman learned that Michael Tarnopol ("Tarnopol"), a Managing Director at Bear, Stearns & Co. ("Bear Stearns"), had a longstanding business relationship with Fred Sullivan ("Sullivan"), one of Technicolor's directors. Perelman apparently asked Tarnopol to seek Sullivan's assistance in making contact with Technicolor's management. On September 10, 1982, Tarnopol informed Sullivan that Perelman and MAF were interested in Technicolor.7 Sullivan agreed to meet Perelman for lunch.
Sullivan did not divulge his conversation with Tarnopol or his planned meeting with Perelman to any of his fellow Technicolor board members. On the following Monday, September 13, Sullivan instructed his secretary to call his stockbroker and place a purchase order for ten thousand shares of Technicolor stock at the market.8 At the time, Sullivan owned 21,250 shares of Technicolor.
On September 17, Sullivan met with Tarnopol and Perelman. Perelman told Sullivan that he was interested in acquiring Technicolor through a one hundred percent stock acquisition. Perelman told Sullivan that he would pay about $15 per share. Sullivan replied that he did not believe Kamerman would be interested in selling Technicolor at that price, but agreed to take the matter up with him. Perelman informed Sullivan that MAF was intent on purchasing up to five percent of Technicolor's stock in the open market. In fact, MAF had, since September 10, 1982, been purchasing Technicolor stock at market. By September 23, MAF had acquired 186,500 shares of Technicolor, representing approximately 3.7 percent of Technicolor's outstanding stock.9
Prior to the October 4th meeting, Perelman again contacted Sullivan and requested to meet with him at Perelman's offices. The parties met, purportedly for Sullivan to assist Perelman in preparing for his coming meeting with Kamerman.10
Kamerman also talked with Bjorkman and George Lewis ("Lewis"), two of Technicolor's directors. Lewis was Kamerman's tax attorney and Bjorkman was Technicolor's largest stockholder11 and Chairman of Technicolor's Executive Committee. As Perelman wanted Kamerman and Bjorkman to grant him an option to purchase their shares prior to any tender offer, Kamerman sought Lewis' advice on the income tax consequences to Kamerman of sale of his option shares to Perelman in 1982 rather than in 1983.12
In further one-on-one private meetings and negotiations between Kamerman and Perelman, they agreed that, if the deal closed, Sullivan should receive a "finder's fee" of $150,000 for his role in introducing the parties. The amount of the fee had been suggested by Bear Stearns and was originally to have been paid by Bear Stearns.13 Kamerman and Perelman also negotiated a post-merger employment contract for Kamerman as Chief Executive Officer of Technicolor, a contract which the court found to be significantly different from Kamerman's existing contract.14
On October 18 Brown and a project team from Goldman flew to Los Angeles to meet with Kamerman and senior management of Technicolor. The team consisted of a Goldman vice president, John Golden, and two junior associates. Kamerman briefed the Goldman team on his negotiations with Perelman and provided them with background information on Technicolor. Kamerman instructed the team that he wanted a report back in three days giving a preliminary view on whether Perelman's offering price of $20 per share was worth pursuing and a fairness opinion based on a price range of $20-22 per share. Kamerman also made it clear to the Goldman team that their contacts with Technicolor were to be limited to three officers of the company — Kamerman, Oliphant and Powitzky — and no one else without Kamerman's approval.15
Back in New York, Goldman put together a valuation package; and three days later, on October 21, Goldman told Kamerman by telephone that a price of $20-$22 was worth pursuing. However, Goldman also suggested that Kamerman consider other possible purchasers for Technicolor. Goldman prepared an LBO model which included both an analysis of Technicolor's value and MAF's financial condition.16
On October 27, six days after Kamerman's receipt of Goldman Sachs' fairness opinion, he and Perelman reached an agreement on price by telephone.17 Perelman initially offered $22.50 per share for Technicolor's stock. Kamerman, responding that he could not take that bid to the board, countered with a figure of $23 per share and stated that he would recommend its acceptance to the board. Perelman agreed to $23.
Ryan, though also President and Chief Operating Officer, knew little except what he had learned indirectly from Davis of Gulf & Western.18 Prior to the meeting, all Kamerman had told Ryan was a cryptic remark made October 27 when Kamerman stated, "Something is going on. I'm having negotiations with somebody...."
Kamerman then turned the meeting over to Technicolor's outside counsel, Brown. Brown did not know that Sullivan, Bjorkman, Lewis and Isham had limited knowledge of the proposed sale and that Blanco, Simone and Frye had no substantial prior knowledge of the sale. Brown explained the structure of the proposed transaction, summarized the terms of the proposed merger, and reviewed the key documents involved.19 Brown advised the board that it was not obligated to accept Perelman's offer, or any offer for that matter, or obligated to "shop" the company.
Goldman then made an oral presentation, based on a 78-page "board book,"20 and explained Technicolor's financial projections, stock price and ownership data. It presented its LBO analysis and concluded with an oral opinion that a price of $23 was fair, subject to further due diligence.21
According to the minutes of the meeting, and the trial court so found, the board unanimously approved the Agreement and Plan of Merger with MAF and recommended to the stockholders of Technicolor the acceptance of the offer of $23 per share. The board also unanimously recommended repeal of the supermajority provision of the Certificate of Incorporation. The board approved the Stock Option Agreement, Sullivan's finder's fee and Kamerman's new employment contract.22
In November 1982, Technicolor filed a 14D-9 and a 13D with the Securities and Exchange Commission in which the board recommended that the shareholders tender their shares to MAF and MAF commenced an all-cash tender offer of $23 per share to the shareholders of Technicolor. By December 3, 1982, MAF had acquired 3,754,181 shares, or 82.19 percent, of Technicolor; the tender offer was closed on November 30, 1982.23
Principal Rulings Below/Issues on Appeal
Addressing first the rule's requirement of director duty of loyalty, the Chancellor found that "the Board as a whole" had not breached its collective duty of loyalty, notwithstanding the court's finding that at least one director, Sullivan, if not a second director, Ryan, had breached his duty of loyalty.24 The court also found that all the directors had presumably breached their duty of care. The Chancellor found the evidence sufficient to conclude that Director Sullivan had been disloyal because of his interest in the transaction. The court also questioned whether Director Ryan was also disloyal due to a conflict of interest. Notwithstanding, the Chancellor ruled that Cinerama had failed to rebut the business judgment rule's presumption of loyalty accorded the Technicolor board's decision of October 29. The court held that the shareholder, to rebut the rule, was required to prove that the disloyal director either dominated the board or in some way tainted the presumed independence of the remaining board members voting to approve the challenged transaction. Thus, it was Cinerama's burden to establish that any director's self-interest was individually, or collectively, so "material" as to persuade a trier of fact that the independence of the board "as a whole" had been compromised. Applying this test, the court found that Cinerama had not rebutted the business judgment rule's presumption of director independence.25
Cinerama asserts that the Chancellor has committed fundamental errors of law in his formulation and application of the business judgment rule's requirements of director duty of loyalty and duty of care. Cinerama first contends that the Chancellor has placed upon a shareholder plaintiff burdens of proof for breach of duty of loyalty26 and duty of care that are foreign to equity and to Delaware law.27 Cinerama further contends that, even under the court's restatement of the duty of loyalty element of the rule, the court has clearly erred in finding that there is insufficient record evidence that a majority of the directors had breached their duty of loyalty to rebut the business judgment rule. Cinerama appeals several other adverse rulings of the Chancellor, while abandoning one claim below. Cinerama abandons its claim that the directors acted in bad faith. Except as to Director Sullivan, the court found no persuasive evidence of bad faith and concluded that the directors had acted in good faith in approving the merger transaction and related agreements. Personal Liability Opinion at 36-37. We address the remaining adverse rulings, referred to in section I supra, and appealed by Cinerama, in section VI infra.
Defendants concede the novelty of the Chancellor's reformulation of the rule's duty of care elements for rebutting a business judgment standard of judicial review to require a shareholder plaintiff to establish harm or loss.28 Defendants also concede the lack of any Delaware corporate law precedent for applying tort principles of liability to a fiduciary duty of care analysis. However, defendants assert that the Chancellor's requirement of proof of injury for a breach of the duty of care to be actionable, though novel, is "sound."
The principal issues raised involve the formulation and application of the duty of loyalty and duty of care standard of the business judgment rule. The formulation of the duty of loyalty and duty of care involves questions of law which are, of course, subject to de novo review by this Court. Kahn v. Household Acquisition Corp., Del.Supr., 591 A.2d 166, 175-76 (1991); Waggoner v. Laster, Del.Supr., 581 A.2d 1127, 1132 (1990); Fiduciary Trust Co. v. Fiduciary Trust Co., Del. Supr., 445 A.2d 927, 930 (1982). Assuming a correct formulation of the rule's elements, the trial court's findings upon application of the duty of loyalty or duty of care, being "fact dominated," are, on appeal, entitled to substantial deference unless clearly erroneous or not the product of a logical and deductive reasoning process. Citron v. Fairchild Camera & Instrument Corp., Del.Supr., 569 A.2d 53, 64 (1989); see also Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972).
Our starting point is the fundamental principle of Delaware law that the business and affairs of a corporation are managed by or under the direction of its board of directors. 8 Del.C. § 141(a). In exercising these powers, directors are charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders. Guth v. Loft, Inc., Del.Supr., 5 A.2d 503, 510 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Van Gorkom, 488 A.2d at 872; Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1280 (1988).
The business judgment rule is an extension of these basic principles. The rule operates to preclude a court from imposing itself unreasonably on the business and affairs of a corporation. See Mills, 559 A.2d at 1279; Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 954 (1985); Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971); A.C. Acquisitions Corp. v. Anderson, Clayton & Co., Del.Ch., 519 A.2d 103, 111 (1986). The rule, though formulated many years ago, was most recently restated by this Court as follows:
The rule operates as both a procedural guide for litigants and a substantive rule of law. As a rule of evidence, it creates a "presumption that in making a business decision, the directors of a corporation acted on an informed basis [i.e., with due care], in good faith and in the honest belief that the action taken was in the best interest of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984). The presumption initially attaches to a director-approved transaction within a board's conferred or apparent authority in the absence of any evidence of "fraud, bad faith, or self-dealing in the usual sense of personal profit or betterment." Grobow v. Perot, Del.Supr., 539 A.2d 180, 187 (1988). See Allaun v. Consolidated Oil Co., Del. Ch., [16 Del.Ch. 318] 147 A. 257, 261 (1929).
The rule posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be "attributed to any rational business purpose." Sinclair Oil Corp., 280 A.2d at 720; see also Unocal, 493 A.2d at 954. Thus, a shareholder plaintiff challenging a board decision has the burden at the outset to rebut the rule's presumption. Aronson, 473 A.2d at 812; Van Gorkom, 488 A.2d at 872; Citron, 569 A.2d at 64. To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty — good faith, loyalty or due care. See Citron, 569 A.2d at 64; Van Gorkom, 488 A.2d at 872; Aronson, 473 A.2d at 812. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. See, e.g., Citron, 569 A.2d at 64; Van Gorkom, 488 A.2d at 872; see also 8 Del.C. § 141(a). If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the "entire fairness" of the transaction to the shareholder plaintiff. Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376 (1993); Mills, 559 A.2d at 1279; Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710 (1983).
Under the entire fairness standard of judicial review, the defendant directors must establish to the court's satisfaction that the transaction was the product of both fair dealing and fair price. Nixon, 626 A.2d at 1376; Mills, 559 A.2d at 1279; Weinberger, 457 A.2d at 710. Further, in the review of a transaction involving a sale of a company, the directors have the burden of establishing that the price offered was the highest value reasonably available under the circumstances. Mills, 559 A.2d at 1288; see also Citron, 569 A.2d at 67-68 (board should obtain best available transaction for shareholders) (citing Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986)).
IV. DIRECTOR DUTY OF LOYALTY/BOARD DUTY OF LOYALTY
Presumption of Loyalty/Duty of Loyalty
Guth, 5 A.2d at 510; see also Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1345 (1987). Essentially, the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson, 473 A.2d at 812.29
Applying this two-part standard, the Chancellor found Cinerama's evidence of director self-interest sufficient to meet the first part of the materiality test only as to Director Sullivan, and possibly Director Ryan, but, as to each, to fail the second requirement. The court concluded that Sullivan's or Ryan's material self-interests did not taint the board's overall independence.30
Cinerama argues that the Chancellor's restatement of the requirements of director self-interest for purposes of rebutting the business judgment rule's presumption of director duty of independence is erroneous as a matter of law. Cinerama contends that one director's receipt of any tangible benefit not shared by the stockholders generally is sufficient to overcome the business judgment presumption of director and board independence. Cinerama thereby relies upon certain statements of this Court in Aronson and Pogostin, which we find to be taken out of context and selectively applied. In Aronson, this Court stated that a shareholder plaintiff, to establish a breach of duty of loyalty, must present evidence that the director either was on both sides of the transaction or "derive[d] any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally." Aronson, 473 A.2d at 812 (citations omitted) (emphasis added). Thus, Aronson's qualification that the personal financial benefit must rise to the level of self-dealing is consistent with, and in fact supports, the Chancellor's formulation. Cinerama also misreads this Court's statement in Pogostin that "[d]irectorial interest exists whenever ... a director ... has received, or is entitled to receive, personal financial benefit from the challenged transaction that is not equally shared by the stockholders." 480 A.2d at 624 (emphasis added).
Cinerama misunderstands Pogostin. Nothing we said there suggests that one director's self-interest, or even an act of disloyalty by that director, so infects the entire process that the board itself is deprived of the benefit of the business judgment rule. This Court has never held that one director's colorable interest in a challenged transaction is sufficient, without more, to deprive a board of the protection of the business judgment rule presumption of loyalty. Provided that the terms of 8 Del.C. § 144 are met, self-interest, alone, is not a disqualifying factor even for a director. To disqualify a director, for rule rebuttal purposes, there must be evidence of disloyalty. See Citron, 569 A.2d at 65-66; Unocal, 493 A.2d at 958; Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964). Examples of such misconduct include, but certainly are not limited to, the motives of entrenchment, see Gilbert, 575 A.2d at 1146, Polk v. Good, Del.Supr., 507 A.2d 531, 536-37 (1986), Unocal, 493 A.2d at 954-56; fraud upon the corporation or the board, see Mills, 559 A.2d at 1283; abdication of directorial duty, see Lutz v. Boas, Del.Ch., 171 A.2d 381, 395-96 (1961); or the sale of one's vote. Neither Aronson nor Pogostin can be fairly read to support Cinerama's thesis that a finding of one director's possession of a disqualifying self-interest is sufficient, without more, to rebut the business judgment presumption of director/board loyalty; and no Delaware decisional law of this Court supports such a result.
Cinerama also takes exception to the Chancellor's use of a reasonable person standard for determining the materiality of a given director's self-interest in a challenged corporate transaction. We agree that the Chancellor's use of the reasonable person standard is unhelpful and, indeed, confusing.31 Therefore, we reject its use in resolving whether evidence of director self-interest is sufficient to rebut the rule.
Personal Liability Opinion at 23-24 (emphasis added). It is unclear to us under this formulation precisely what a shareholder plaintiff would have to prove to demonstrate a reasonable likelihood of lack of board independence.32
Beyond the question of burden of proof, we find the Chancellor's requirement that a director's self-interest translate into board self-interest to be an apparent borrowing of precepts embodied in 8 Del.C. § 144(a). Enacted in 1967, section 144(a) codified judicially acknowledged principles of corporate governance to provide a limited safe harbor for corporate boards to prevent director conflicts of interest from voiding corporate action. 56 Del.Laws, ch. 50 (1967); see Beard v. Elster, Del.Supr., 160 A.2d 731, 738 (1960) (presection 144(a) case applying principles embodied in section 144(a)); Folk, The Delaware General Corporation Law § 144.4 at 144:6 n. 11 (analogizing section 144(a) and pre-enactment law); Michael P. Dooley, Two Models of Corporate Governance, 47 Bus. Law 461, 489 n. 96 (1992) (section 144(a) viewed as a codification of common law). At the very least, section 144(a) protects corporate actions from invalidation on grounds of director self-interest if such self-interest is: (1) disclosed to and approved by a majority of disinterested directors; (2) disclosed to and approved by the shareholders; or (3) the contract or transaction is found to be fair "as to the corporation."33 8 Del.C. § 144(a)(1), (2) and (3); Folk, The Delaware General Corporation Law § 144:5. Section 144(a)(1) appears to be a legislative mandate that, under such circumstances, an approving vote of a majority of informed and disinterested directors shall remove any taint of director or directors' self-interest in a transaction. See Fliegler v. Lawrence, Del.Supr., 361 A.2d 218, 222 (1976).
(2) The affirmative vote of the holders of at least ninety-five per cent ... of the outstanding shares of capital stock of the Corporation entitled to vote ... shall be required for the adoption or authorization of a ... [merger] ... * * * * * * (5) No amendment to the ... [charter] ... shall amend, alter, change or repeal any of the provisions of this Article Tenth, unless the amendment ... shall receive the affirmative vote of the holders of at least ninety-five per cent ... of the outstanding shares of capital stock of the Corporation entitled to vote ...; provided that this paragraph 5 shall not apply to ... any amendment ... unanimously recommended to the stockholders by the Board of Directors of the Corporation....
If unanimity is required, will one director's self-interest or lack of independence violate the requirement? Do the provisions of section 144 override a charter requirement of unanimity?34 Does full disclosure of a director's interest to an otherwise disinterested board satisfy Technicolor's unanimity requirement?35
We have also stated that the rule is premised on a presumption that the directors have severally met their duties of loyalty (see section IV supra) and that the directors have collectively, as a board, met their duty of care. See Barkan, 567 A.2d at 1286; Moran, 500 A.2d at 1356.36
It is not the case, in my opinion, that in an arms-length, third party merger proof of a breach of the board's duty of care itself entitles plaintiff to judgment. Rather, in such a case, as in any case in which the gist of the claim is negligence, plaintiff bears the burden to establish that the negligence shown was the proximate cause of some injury to it and what that injury was. See Barnes v. Andrews, 298 F. 614, 616-18 (S.D.N.Y.1924); Cf. Virginia-Carolina Chemical Co. v. Ehrich, 230 F. 1005, 1013 (D.S.C.1916); Hathaway v. Huntley, Mass. Supr., [284 Mass. 587] 188 N.E. 616, 618-19 (1933).
As defendants concede, this Court has never interposed, for purposes of the rule's rebuttal, a requirement that a shareholder asserting a claim of director breach of duty of care (or duty of loyalty) must prove not only a breach of such duty, but that an injury has resulted from the breach and quantify that injury at that juncture of the case. No Delaware court has, until this case, imposed such a condition upon a shareholder plaintiff. That should not be surprising. The purpose of a trial court's application of an entire fairness standard of review to a challenged business transaction is simply to shift to the defendant directors the burden of demonstrating to the court the entire fairness of the transaction to the shareholder plaintiff, applying Weinberger and its progeny: Rosenblatt, 493 A.2d 929; Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840 (1987); and Mills, 559 A.2d 1261. Requiring a plaintiff to show injury through unfair price would effectively relieve director defendants found to have breached their duty of care of establishing the entire fairness of a challenged transaction.
The Chancellor so ruled, notwithstanding finding from the record following trial that whether the Technicolor board exercised due care in approving the merger agreement was not simply a "close question" but one as to which he had "grave doubts." Personal Liability Opinion at 5-6. The trial court's doubts were based on at least five explicit predicate findings on the issue of due care: (1) that the agreement was not preceded by a "prudent search for alternatives," id. at 6; (2) that, given the terms of the merger and the circumstances, the directors had no reasonable basis to assume that a better offer from a third party could be expected to be made following the agreement's signing, id.; (3) that, although Kamerman had discussed Perelman's "approach" with several of the directors before the meeting, most of the directors had little or no knowledge of an impending sale of the company until they arrived at the meeting and only a few of them had any knowledge of the terms of the sale and of the required side agreements, id. at 12-13; (4) that Perelman "did, probably, effectively lock-up the transaction on October 29 when he acquired rights to buy the Kamerman and Bjorkman shares (about eleven percent together) and acquired rights under the stock option agreement to purchase stock that would equal 18 percent of the company's outstanding stock after exercise" given Technicolor's charter provision and Perelman's prior stock ownership of about five percent, id. at 49; and (5) that the board did not "satisfy its obligation [under Revlon] to take reasonable steps in the sale of the enterprise to be adequately informed before it authorized the execution of the merger agreement." Id. at 40. In addition, the Chancellor noted the relevance of Revlon in "illuminat[ing] the scope of [the] board's due care obligations ..." and implied that the Technicolor board's failure to auction the company evidenced a breach of their duty of care.37 Id.
The trial court's presumed findings of fact of board breach of duty of care clearly brought the case under the controlling principles of Van Gorkom and its holding that the defendant board's breach of its duty of care required the transaction to be reviewed for its entire fairness. The Chancellor, without stating any reasons for finding Van Gorkom not to be controlling, chose instead to adopt the actionable negligence principles of Barnes. Personal Liability Opinion at 41-43.38 Applying Barnes, the Court of Chancery concluded that Cinerama was not entitled to relief because it had failed to present evidence of injury caused by the defendants' negligence.
The Chancellor's reliance on Barnes is misguided.39 While Barnes may still be "good law," Barnes, a tort action, does not control a claim for breach of fiduciary duty. In Barnes, the court found no actionable negligence or proof of loss — and granted defendant's motion for a nonsuit or grant of judgment for defendant on the merits. Here, the court was determining the appropriate standard of review of a business decision and whether it was protected by the judicial presumption accorded board action. The tort principles of Barnes have no place in a business judgment rule standard of review analysis.
Cinerama first contends that because Director Simone voted against the merger, the Technicolor board's less-than-unanimous approval of the merger did not satisfy the unanimity requirement of Technicolor's charter.40 Whether Simone voted against the merger was a question of fact as to which the evidence was in conflict. The trial court rejected Simone's deposition testimony, given seven years later, and when he was in frail health, that he had, contrary to the minutes, voted against the resolution authorizing acceptance of the MAF offer. We defer to the trial court's finding, there being substantial evidence to support it. Levitt v. Bouvier, 287 A.2d at 673; Citron, 569 A.2d at 64. Accordingly, we affirm the court's rejection of Cinerama's claim that the merger was void ab initio because Simone had cast an opposing vote.
1. Hereafter we refer to MAF and Macanfor, also a Delaware corporation, collectively as "MAF."
2. Therein we stated twice that if, in the consolidated proceedings, the court should determine that the merger "should not have occurred due to fraud, breach of fiduciary duty, or other wrongdoing on the part of the defendants, then Cinerama's appraisal action will be rendered moot and Cinerama will be entitled to receive rescissory damages." Cede I, 542 A.2d at 1191. But see sections IV and VI infra.
3. We borrow liberally from, and generally adopt, the Chancellor's findings.
4. Kamerman, previously Chief Executive Officer of a cosmetics company, had been elected to the board of Technicolor as a result of a proxy contest in 1970, and later became a vice-president. In 1976, Kamerman had become Chairman of the Board and Chief Executive Officer of Technicolor, and he continued to hold this position through the date of the merger in question. In 1982 Kamerman was also the second largest shareholder of Technicolor stock. The Court of Chancery characterized Kamerman as a "strong-willed" chairman.
5. Technicolor's stock was traded on the New York Stock Exchange on the NASDAQ index. To the consternation of management, the value of Technicolor stock fluctuated wildly during the late 1970's and early 1980's. During the late 1970's, Technicolor stock had traded in the $8 to $10 range. In 1980 and 1981, the price of the stock rose above $28 per share, and peaked at $28.50 per share in April 1981. The increase in the public market price of the stock coincided with a dramatic increase in the price of silver. The film processing technique employed by Technicolor utilized silver, which could be reclaimed and sold after the process was completed. With the silver market stabilizing in 1981, Technicolor's consolidated net income fell off. As earnings stagnated and silver prices began to fall, Technicolor stock began to decline from an April 1981 high of over $28 by nearly $10 to $18.63. The company's earnings also declined through the balance of 1981 and into 1982. By June 30, 1982, Technicolor stock was trading at $10.37 a share.
6. In September and October, 1982, MAF representatives had a series of discussions with Chase Manhattan Bank and Bank of America concerning how MAF would finance a proposed acquisition of Technicolor. MAF and the banks recognized that MAF would have to repay any acquisition debt from the sale of Technicolor's assets and from the cash flow of both Technicolor and MAF. In October the Chase consortium of banks informed Perelman that they would be willing to extend MAF an $85 million line of credit to acquire Technicolor, an amount later increased to $90 million.
7. The parties differ over the details of the initial telephone conversation, specifically, whether Tarnopol stated that Perelman was interested in making an "investment" in Technicolor or whether he told Sullivan that Perelman was interested in acquiring Technicolor. The court made no findings on this point. However, the minutes of the Technicolor board meeting of October 29, 1992, support plaintiff. The minutes recite Kamerman as stating that Sullivan learned that a client of Bear Stearns wanted to meet with him "to explore the possibility of acquiring [Technicolor]."
8. While Sullivan instructed his secretary to place an order for ten thousand shares, the order executed was for only one thousand shares. Sullivan's trading was ultimately investigated by the Securities and Exchange Commission for insider trading, and the matter was settled, with Sullivan required to pay $13,705.09 to Technicolor.
9. By October 7, MAF, through ongoing purchases, had acquired 220,000 shares of Technicolor, or about 4.8 percent of its issued and outstanding shares.
10. Sullivan's explanation for meeting with Perelman at Perelman's office was that Perelman wanted to find out "what kind of a man" Kamerman was in advance of their meeting in Los Angeles.
11. Bjorkman owned 273,304 shares of Technicolor and his wife owned an additional 136,102 shares. Together they owned about nine percent of the company.
12. Lewis informed Kamerman that selling his option shares in 1983 rather than 1982 would make the gain long-term.
13. On advice of counsel, Sullivan's fee was later "restructured" for payment by Technicolor, after the merger, rather than before; and Bear Stearns made a corresponding reduction in its finders fee.
14. Kamerman's existing contract was for five years at a minimum annual salary of $426,216 and contained an additional consulting agreement whereby Kamerman would receive $100,000 per year for five years upon the termination of his employment. Under the renegotiated contract, the terms and salary of Kamerman's base contract were unchanged, but the compensation provided in the consulting agreement was increased to $150,000 for each of those five years. The new contract also guaranteed Kamerman his salary for the full term of the contract in the event Kamerman left Technicolor.
15. The leader of the Goldman Sachs team did not testify at trial; but one of his associates, Sapp, testified that when the Goldman Sachs team asked to speak to Technicolor's Chief Operating Officer Ryan, Kamerman refused to permit a meeting.
16. The LBO model showed that "a $23 LBO" was feasible, taking into consideration both Technicolor's value and MAF's level of borrowing, and that $25 might be feasible. Goldman found that any price significantly higher would become "problematic" because of MAF's debt; and concluded that a price of $27 made an LBO "almost impossible."
17. The trial court found that date to be October 17, but the parties agree that the correct date was October 27.
18. The Court of Chancery found that Ryan believed Perelman would deal with him fairly and maybe even place him in Kamerman's position. In fact, the court found that shortly after the merger in February 1983, Ryan was "promoted" after Kamerman's employment was terminated.
19. There is some question whether the documents were in fact present and available for the directors to study.
20. This book included median and mean values for other similar companies, a comparison of acquisitions in the motion picture business, a common stock comparison for other retailing companies, the financial performance of Technicolor and its constituent businesses, a profit and loss statement for each of Technicolor's major divisions, projections for Technicolor through 1989, projections on MAF's ability to consummate the transaction, and a Standard and Poor's tear sheet on MAF.
21. On November 19, after the merger had been approved and announced to the shareholders but before the shareholders voted on it, Goldman issued a written fairness opinion that was identical to the oral one. This written opinion was disclosed to the shareholders before their vote.
22. The minutes of this meeting were subsequently ratified at the next meeting of the Technicolor Board on November 9, 1982, a meeting at which all nine directors were again present.
23. MAF ultimately paid $125,000,000 to acquire Technicolor. Of this sum, $90,000,000 was loaned MAF by banks, $30,000,000 was obtained by MAF through the sale of junk bonds, and $5,000,000 was MAF's own money.
24. The court found that "Sullivan [had] made money on the transaction ($150,000 fee paid by MAF — i.e., Technicolor after the merger) and apparently engaged in or instituted some trades in Technicolor stock while in possession of non-public information." Personal Liability Opinion at 35. The court also found Sullivan guilty of bad faith "especially [regarding] his cooperation with Mr. Perelman before Kamerman met with Perelman." Id. at 36 n. 16.
25. The court ruled: "... the evidence will not support a conclusion that the Board of Directors, taken as a whole deliberative body, labored under a circumstance that created any impairment of its independence with respect to its decision to enter into the MAF merger agreement...." Personal Liability Opinion at 4-5.
26. Cinerama asserts that the Chancellor's formulation of a materiality test to determine when evidence of a given director's self-interest is sufficient, without more, to overcome the presumption of director loyalty is "new law" and substitutes for a "normative, objective standard a subjective `materiality' test." Cinerama asserts that the court has created an "ad hoc subjective test" and an "impossible standard," requiring a plaintiff to prove that a particular director's financial interest in the challenged transaction is "sufficiently large to create a reasonable likelihood that it actually affected his actions to the corporation's detriment." Cinerama asserts that the court's standard is "no standard at all ... [requiring] [e]ach deal, each director and each conflict... to be reviewed to decide if it rises to the level of affecting a director's judgment." Finally, Cinerama contends that corporate directors' duties of loyalty are not to be judged by the reasonable person standard employed to determine tort law liability cases.
27. Interestingly, Cinerama does not appear to attach any particular significance to Technicolor's charter requirement of director unanimity for approval of a sale of the company; nor does Cinerama appear to rely on this charter requirement as having any relevance to either the issue of director loyalty or director due care. As will be seen below, we find that the unanimity requirement raises significant unresolved and unaddressed issues regarding the sufficiency of the evidence of director disloyalty to rebut the business judgment presumption accorded the board's action.
28. In support of their argument that the Chancellor "properly applied" the business judgment rule, defendants state that the Chancellor's "approach to the question of director disinterest and independence is firmly founded in Delaware law" (emphasis added). However, in addressing the Chancellor's critical ruling that Cinerama retained the burden of proving all elements of its case, including damages, defendants make the flat concession that "no Delaware corporate decision appears to have addressed the precise question." Defendants conclude by stating that the Chancellor's placement of a burden of proof on Cinerama to establish that it has been harmed by the defendant directors' breach of duties seems "unexceptionable." Interestingly, defendants discuss the question of a shareholder's burden of proof of injury solely in the context of the Chancellor's formulation of the duty of loyalty and do not address the merits of the Chancellor's requirement of proof of injury in the context of a shareholder's claims for defendant directors' breach of their duty of care. Nowhere in defendants' briefing of the duty of care element of the business judgment rule do defendants address the legal correctness of the Chancellor's placing on Cinerama the burden of establishing harm to have resulted from the defendant directors' breach of their duty of care.
29. See also Ernest L. Folk, Delaware General Corporation Law: A Commentary and Analysis §§ 141.2, 144.2 (3d. ed. 1992); Dennis J. Block, Nancy E. Barton and Stephen A. Radin, The Business Judgment Rule, Duty of Loyalty, 74 et seq. (3rd ed. 1990); Robert Clark, Corporate Law §§ 4.1-5.4 (1986).
30. The Chancellor stated: "For the reasons set forth below, I conclude, first, that the evidence will not support a conclusion that the board of directors, taken as a whole deliberative body, labored under a circumstance that created any impairment of its independence with respect to its decision to enter into the MAF merger agreement and to endorse the tender offer and merger that that agreement contemplated. Moreover, a review of the credible evidence ... persuades me not only that the board as a whole had no such disability, but that no member of the board other than Fred Sullivan, an outside director, had on balance a material financial interest conflicting with that of the corporation's stockholders." Personal Liability Opinion at 4-5 (emphasis added) (footnote omitted).
31. The reasonable person standard lacks precision. Although it may appear to protect only director actions that do not constitute simple negligence, in practice it protects all director action not constituting gross negligence. See Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125, 130 (1963) (adopting "prudent man" standard in duty of care context); but see Aronson, 473 A.2d at 812 (adopting gross negligence standard in duty of care context); Van Gorkom, 488 A.2d at 873 (adopting gross negligence standard in duty of care context). The Graham formulation is quite confusing and unhelpful. While the opinion seems to apply a "prudent man" standard, id., three paragraphs later it speaks of director liability in terms of reckless conduct. Id. Indeed, we have previously stated that Graham is not a business judgment case. See Aronson, 473 A.2d at 813 n. 7. We also have expressed the view that whatever the Graham standard may be, it has no applicability where there is a breach of the duty of loyalty. See Mills, 559 A.2d at 1284 n. 32.
32. The Chancellor's opinion posits various formulations of a plaintiff's burden of proving the second part of the court's materiality standard.
33. Section 144(a) provides:
(1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee thereof, or the shareholders.
34. As discussed below, section 144 removes the "interested director cloud" from a transaction through three alternative methods and permits an otherwise interested transaction to be brought within the protection of the business judgment rule. See Marciano v. Nakash, Del.Supr., 535 A.2d 400, 403-05 (1987); Fliegler, 361 A.2d at 222. Under this statute, approval of an interested transaction by either a fully-informed disinterested board of directors, 8 Del.C. § 144(a)(1), or the disinterested shareholders, 8 Del.C. § 144(a)(2), provides business judgment protection. Marciano, 535 A.2d at 405 n. 3. Alternatively, a non-disclosing interested director can remove the taint of interestedness by proving the entire fairness of the challenged transaction. Id.; 8 Del.C. § 144(a)(3).
35. Examples of techniques which can restrict the influence an interested director may exert include: recusal of the interested director(s) from participation in board meetings, see Ivanhoe, 535 A.2d at 1343; Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971); resignation from the board by the interested director(s), Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 938 (1985); or establishment of a committee of disinterested, independent directors to review the proposal, Weinberger, 457 A.2d at 709 n. 7; Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981); Citron v. E.I. Du Pont de Nemours & Co., Del.Ch., 584 A.2d 490 (1990). We cite these techniques without implying whether any of them would have removed an interested director taint in the Technicolor board's decision of October 29th.
36. In Barkan, this Court stated: ... a board's actions must be evaluated in light of relevant circumstances to determine if they were undertaken with due diligence [care] and good faith [loyalty]. If no breach of duty is found, the board's actions are entitled to the protections of the business judgment rule.
37. The Chancellor wrote: ... the due care theory and the Revlon theory do not present two separate legal theories justifying shareholder recovery.... [B]oth theories reduce to a claim that directors were inadequately informed (of alternatives, or of the consequences of executing a merger and related agreements). An auction is a way to get information. A pre- or post-agreement market-check mechanism is another, less effective but perhaps less risky, way to get information. A "lock-up" is suspect because it impedes the emergence of information in that an alternative buyer that would pay (or would have paid) more is less likely to emerge once such an impediment is in place.
38. Cinerama asserts that it is a "mystery" how the court discovered the Barnes case and then based its decision on Barnes. Barnes was apparently not cited by any of the parties in the briefings below. Cinerama refers to Barnes as "obscure law" that has been cited but six times since 1924 and "never for the proposition relied upon by the Chancellor." Defendants make no adequate response.
39. In Barnes, the receiver of a failed corporation brought suit against Andrews, who was one of the corporation's former directors, for negligence in the performance of his duties. Andrews was charged with taking little, if any, active role as a director because he attended only part of one of two important board meetings. The court found Andrews to have been negligent in his inattention to his directorial duties but not liable for damages since plaintiff failed to prove that the company's insolvency actually resulted from Andrews' negligence rather than the negligence of his fellow directors. Then District Judge Learned Hand ruled: Therefore I cannot acquit Andrews of misprision in his office, though his integrity is unquestioned. The plaintiff must, however, go further than to show that he should have been more active in his duties. This cause of action rests upon a tort, as much though it be a tort of omission as though it had rested upon a positive act. The plaintiff must accept the burden of showing that the performance of the defendant's duties would have avoided the loss, and what loss it would have avoided.
40. As discussed in section IV above, Technicolor's charter contained an anti-takeover provision requiring a unanimous vote of the board of directors to repeal its provision that any merger or sale of the company must receive the approval of ninety-five percent of the shares outstanding.