In re Southern Peru Copper Corporation Shareholder Derivative Litigation: Delaware Chancery Court Finds Acquisition by Southern Peru Copper of a Subsidiary Owned by Its Controlling Shareholder Did Not Satisfy Entire Fairness and Awards $1.26 Billion in DamagesSullivan & Cromwell LLP - October 24, 2011
In its recent Southern Peru decision, the Delaware Chancery Court found that the process undertaken and the price paid by Southern Peru, a NYSE listed company, for the purchase of Minera, a private company, from its controlling stockholder was not entirely fair. Opining that the Southern Peru Special Committee entered “the altered state of a controlled mindset” and allowed Grupo Mexico, the controlling shareholder of Southern Peru, to impose on Southern Peru its desired purchase of Minera at its chosen purchase price, the court awarded the plaintiffs $1.26 billion in damages. The Southern Peru decision, which sets out Chancellor Strine’s views on the dynamics of controlled board situations, highlights the exacting nature of entire fairness review and serves as a reminder of the consequent need for detailed and thoughtful attention to process in a transaction between a controlling shareholder and its controlled public entity. The Southern Peru court found that the Special Committee’s conduct did not adequately replicate the arm’s-length negotiation that defines a well-functioning Special Committee and thereby failed to shift the burden of proof on the question of entire fairness to the plaintiffs. At the same time, the court made clear that even if the burden of proof had shifted, the result would have been the same since the standard of proof is a preponderance of the evidence and the court was not “stuck in equipoise” on the issue of entire fairness in the case. The decision also confirmed precedent that a majority of the minority vote does not shift the burden unless it is both fully informed and an actual condition to the transaction, which it was not in the Southern Peru transaction. The decision makes clear what is already well established in Delaware—that entire fairness requires a Special Committee that is rigorous and displays real bargaining power, including the ability to say no to the proposed transaction. The court was critical of the Special Committee’s willingness to accept a transaction based on relative valuations, particularly given the Special Committee’s failure to push for a transaction based on Minera’s standalone valuation and Southern Peru’s market value, its failure to pursue analyses that might have supported higher valuations for Southern Peru while pursuing such analyses of Minera, its failure to pursue alternative transaction structures in order to test the proposition that Minera was undervalued, and its failure to reconsider its recommendation before the shareholder vote in light of Southern Peru’s disproportionately strong financial results in the period after the transaction was agreed.