Supreme Court Affirms Damages and Fee Award in Southern Peru
August 27, 2012
In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), the Delaware Supreme Court affirmed the Court of Chancery’s post-trial decision and final judgment awarding more than $2 billion in damages (including interest) and $304 million in attorneys’ fees in In re Southern Peru Copper Corp. Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011, revised Dec. 20, 2011) (A summary of the Court of Chancery’s initial opinion can be found here). As described in our prior alert, the plaintiff brought a derivative action challenging the fairness of Southern Peru’s acquisition of Minera México, S.A. de C.V., which was 99.15% owned by Southern Peru’s controlling stockholder, in a stock-for-stock merger. The Court of Chancery determined that Southern Peru overpaid for Minera and awarded damages in the amount of the overpayment, plus pre- and post-judgment interest.
The defendants raised several issues on appeal, arguing that the Court of Chancery impermissibly denied the defendants an opportunity to present testimony from a key witness (namely, an employee of the special committee’s investment banker); committed reversible error by failing to determine which party bore the burden of proof before trial and by incorrectly allocating that burden to the defendants, despite the existence of a well-functioning special committee; made an arbitrary and capricious determination regarding the fair price of the transaction; and abused its discretion in granting a $304 million award of attorneys’ fees. In its nearly 110-page opinion, the Supreme Court rejected each of these arguments.
First, the Court found that the Court of Chancery did not impermissibly exclude the testimony of a key defense witness. Rather, the Court found that the Court of Chancery, acting within its discretion to control its docket, simply declined to change the trial scheduling order to accommodate the defendants’ “eleventh-hour” request. The Court reasoned that the defendants’ assertion that they were unfairly prejudiced by the denial of the request was undermined by the record, given that they had previously acknowledged that they may not have a live witness from the investment banker at trial. Moreover, the Court held that the Court of Chancery’s finding that allowing the “eleventh-hour” request would have been unfair to the plaintiff was supported by the record and was the product of a logical and deductive reasoning process.
Second, the Supreme Court found no fault with the Court of Chancery’s determinations on the burden of persuasion as to fairness in this context, where the controlling stockholder was on both sides of the transaction and the entire fairness standard applied ab initio and the only question was whether to shift the burden of persuasion to the plaintiff. Given the fact-intensive nature of this exercise, the Court did not fault the Court of Chancery for failing to allocate the burden before trial, although it did state “which party bears the burden of proof must be determined, if possible, before the trial begins.” In any event, the Court affirmed the Court of Chancery’s determination that the outcome of the case would have been the same regardless of which party bore the burden of persuasion. Regarding future entire fairness cases in this context, the Court held that “if the record does not permit a pretrial determination that the defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction.” Nevertheless, the Court suggested that transaction participants will continue to have an incentive to use special committees, since “a fair process usually results in a fair price” and the use of a special committee of independent directors remains a valuable means of demonstrating the integrity of the process.
The Court adopted the Court of Chancery’s characterization of the special committee’s process as one that was cramped by a “controlled mindset.” In addition, the Court rejected the defendants’ argument that the Court of Chancery failed to give appropriate weight to the special committee’s “relative valuation” method. Reciting the Court of Chancery’s method of determining the transaction’s fairness, the Court found that it applied a “disciplined balancing test” and “considered the issues of fair dealing and fair price in a comprehensive and complete manner.” That determination, the Court noted, must be accorded substantial deference on appeal. Given that the Court of Chancery’s factual findings were supported by the record, and that its conclusions were the product of an orderly and logical reasoning process, the Court affirmed its determination on the question of fairness.
Third, the Court affirmed the Court of Chancery’s calculation of damages and its award of attorneys’ fees (which fees amounted to 15% of the total judgment (inclusive of pre-judgment interest), plus post-judgment interest through satisfaction of the award). Noting that a post-trial award of damages in an entire fairness proceeding is reviewed for abuse of discretion—and that the Court of Chancery has wider discretion in a case involving loyalty breaches (as in the present case) than in an appraisal action—the Court found that the Court of Chancery fashioned a proper remedy based on its multi-factored “give-get” analysis. On the issue of attorneys’ fees, the Court rejected the defendants’ arguments that the Court of Chancery improperly applied the so-called Sugarland factors, which are considered in determining attorney fee awards. The defendants argued, among other things, that the Court of Chancery gave undue weight to the “results achieved” component of the Sugarland test and that it committed reversible error by allowing plaintiff’s counsel to collect fees premised on nearly $700 million in pre-judgment interest, despite plaintiff counsel’s delay in prosecuting the litigation. The Supreme Court held that the Court of Chancery had not abused its discretion, agreeing that the “extraordinary benefit” achieved through the plaintiff’s efforts merited “a very substantial award of attorneys’ fees.” The Court also found it was not improper to use the total damages award (inclusive of pre-judgment interest) in calculating the fee award, given that the Court of Chancery had already factored the “slow pace” of the litigation into the overall percentage of the benefit it was awarding as fees.
It is worth noting that Justice Berger, although concurring on the merits, dissented on the issue of whether the Court of Chancery properly applied the law when it awarded attorneys’ fees. In Justice Berger’s view, the Court of Chancery’s indication that whether a fee is “reasonable” should be based on whether it establishes a good incentive for plaintiffs to take cases to trial was not grounded in Sugarland.