Court Opinion

ID: 9750901
Source: CourtListenerOpinion
Date Created: 2023-08-28 15:46:17.410508+00
Date Added: 2024-06-11T07:26:28.386532
License: Public Domain

QUILLEN, Judge,
concurring.
With regard to the burden of proof on the issue of fairness, I concur in the decision reached by Justice Walsh in his excellent opinion. In my opinion, the burden of proof in the case clearly should not shift from the defendants to the plaintiff on the issue of fairness. Somewhat ironically, in reaching this conclusion, I do not find it necessary to go beyond the basic facts as found by the Chancellor. See Kahn v. Tremont Corp., et al., Del.Ch., C.A. No. 12339, Allen, C., 1996 WL 145452 (Mar. 21, 1996, revised Mar. 27, 1996) (herein referred to as “Op. Bekm”). I also concur with Justice Walsh’s opinion and decision that the initiation and timing of the purchase were not prejudicial to Tremont Corporation and his further opinion and decisions on the disclosure issues. As to these latter two points, which essentially affirm the Chancellor, I merely note that the Court appears unanimous.
This case is a derivative suit wherein the plaintiff, a stockholder of Tremont Corporation (“Tremont”), alleges that Tremont paid too much for 15% of the stock of NL Industries, Inc. (“NL”) in a purchase from Valhi Corporation (“Valhi”) through an unfair process. Valhi, controlled by Harold Simmons, itself owned 44.4% of Tremont and 62.5% of NL. The burden of proof on the issue of fairness turns on the independence of Tre-mont’s Special Committee (“Committee”) which recommended the purchase. Justice Walsh has ably reviewed the facts and his recitation is more than sufficient context for this modest endeavor.
I accept the Chancellor’s statement of the nature of the proceedings and the facts of the case. Op. Below 1-15. I also accept the Chancellor’s conclusion, in his strongest remark of several, that it is “perfectly appropriate in the circumstances” for Tremont to use its cash reserves to buy stock of NL. Op. Below 48-49. It is indeed important the law not “chill” transactions between related companies that can be mutually productive and beneficial to society. See Op. Below 3. As noted above, while I join in the reversal, I rely on the Chancellor’s findings of basic fact to reach my own conclusion on the burden of proof. Although the same evidence can relate to both the issue of Committee independence and the issue of fairness, the issue of this Committee’s independence in this peculiar factual context requires a separate focus from the ultimate issue of entire fairness.
The Chancellor’s opinion found: a parent-subsidiary transaction existed, “the context in which the greatest risk of undetectable bias may be present” (Op. Below 17-18); Committee member Avy H. Stein, who had prior profitable connections to Harold Simmons and his companies, played the lead Committee role (Op. Below 19, including n. 12); Mr. Stein suggested the selection of a financial adviser for the Committee who had prior ties to both Mr. Stein and Mr. Simmons (Op. Below 9-10, including n. 5 and n. 6, and 19-20); the suggestion for the Committee’s legal advisors came from Tremont’s General Counsel (Op. Below 9-10, including n. 5 and n. 6, and 19-20); NL, in the thirteen months prior to the subject transaction, repurchased *434over 20% of its own shares, at least raising an issue of manipulated price inflation (Op. Below 5-7); this transaction by Valhi, probably not available in 1991 with a non-Simmons enterprise, was a multi-million dollar one for Valhi from a tax savings standpoint and had to be accomplished in the last quarter of 1991 (Op. Below 7-8); Valhi’s chief negotiator knew that an illiquidity discount was appropriate and the block was in fact worth less than market (Op. Below 8, 24); in a very short period, NL’s stock price fell from over $16 per share in late summer 1991 to $12.75 on the date of the purchase, October 30, 1991, at least raising the question of business viability (Op. Below 6-7, 12-24); the Committee relied heavily on regularly prepared projections of NL’s management with incomplete help from its own consultant (Op. Below 11-12, 31-32); notwithstanding knowledge of the appropriateness of a discount, Valhi’s first negotiating suggestion was a premium price and the results of the Committee’s negotiations on other issues, splitting the fourth quarter dividend and registration and co-sale rights, are not self-verifying on the independence issue (Op. Below 1, 13-14 including n. 8); and the price, as finally negotiated, was found to be “as small a discount as could be accepted as fair,” a finding that hardly forecloses questions as to independence (Op. Below 33).
In light of the above-enumerated factors, the independence of the Special Committee, integrity in a process sense, was clearly not substantial enough to shift the burden of persuasion to the plaintiff on the issue of fairness. To me, the ease cries for Missouri skepticism; the burden should be on the control group to demonstrate entire fairness. While it can be of critical importance to the ultimate result whether or not the burden is shifted, failure to shift the burden is not necessarily outcome determinative. Compare Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376, 1381 (1993). Justice Walsh’s decision appropriately remands the case to the Court of Chancery for the requisite factual determinations.
As to remedy, if any proves to be appropriate, I join Justice Walsh’s opinion that all options are open to the Chancellor’s discretion. Lynch v. Vickers Energy Corp., Del. Supr., 429 A.2d 497, 507-08 (1981) (Quillen dissenting); Weinberger, 457 A.2d at 703-04.