In In re Southern Peru Copper Corp. Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), the Court of Chancery awarded $1.263 billion as damages in a derivative action challenging the acquisition by Southern Peru Copper Corporation of another corporation controlled by Southern Peru's controlling stockholder since the Court determined after trial that the controlling stockholder defendants breached their duty of loyalty.
Grupo Mexico, S.A.B. de C.V. is the controlling stockholder of Southern Peru. In 2004, Grupo Mexico proposed that Southern Peru acquire its 99.15% interest in Minera Mexico, S.A. de C.V. for approximately $3.05 billion in the form of shares of Southern Peru common stock. In response, the Southern Peru Board of Directors formed a special committee to evaluate the transaction, which in turn retained its own advisors. After initially engaging in an "illustrative give/gets analysis" indicating a $1.4 billion disparity between the value (based on trading price) of the Southern Peru common stock that would be issued to Grupo Mexico and the value of Minera, the special committee's financial advisor abandoned such analysis and instead focused on "relative" value metrics reflecting the projected relative contribution to cash flows of the two entities to the combined corporation and similar analyses. This approach, which the Court found essentially ignored the market value of the shares being issued by Southern Peru, enabled the special committee's financial advisor to opine that the transaction was fair, and the special committee approved the transaction.
As of the signing of the definitive agreements, the value of the Southern Peru shares to be delivered to Grupo Mexico, based on Southern Peru's share price, was approximately $3.1 billion. But that value increased through closing since the consideration payable to Grupo Mexico, at the special committee's insistence, was a fixed number of shares of Southern Peru common stock and since Southern Peru's share price increased substantially during the post-signing, pre-closing time period.
Consistent with the views of the parties, the Court determined that entire fairness was the appropriate standard of review for a transaction where a controlling stockholder stood on both sides of the transaction, regardless of the existence of the special committee. Indeed, although admittedly not outcome determinative in this case, the Court determined that the defendants (other than the special committee members who had previously been dismissed since the plaintiff had failed to allege non-exculpated breaches of their fiduciary duties) bore the burden of demonstrating the entire fairness of the transaction. The Court concluded that the defendants were not entitled to a shift of the burden of persuasion given the special committee's relative ineffectiveness and issues with the supermajority stockholder vote, including that the vote was not "conditioned up front" and the proxy statement omitted material facts regarding the negotiation process.
Criticizing, among other actions, the special committee's extraction of a narrow mandate for evaluating the proposed transaction and failure to attempt to explore alternatives to the acquisition offered by the controlling stockholder, the "strenuous lengths" the special committee and its financial advisor went to equalize the values of Minera and Southern Peru, the special committee's ignorance of the market value of the Southern Peru shares being issued (when there was no dispute as to the cash value of those shares) and the special committee's failure to consider changing its recommendation with respect to the transaction prior to the stockholder vote in light of the post-signing performance of Southern Peru relative to its projections as well as the substantial increase in the Southern Peru share price after the execution of the definitive acquisition agreement, the Court determined that the transaction was not entirely fair. As a remedy, the Court awarded damages to approximate the difference between the price that would have been paid in an entirely fair transaction and the price actually paid. Using the trading value of the shares issued as of closing of $3.672 billion and the Court's view of the actual value of Minera as of closing of $2.409 billion (based on discounted cash flow and comparable companies analyses as well as a value implied by an initial counteroffer by the special committee), the Court determined the resulting damages to be $1.263 billion, which the Court indicated that Grupo Mexico could satisfy by returning Southern Peru shares.